The Thrift Savings Plan (TSP) has made a temporary change to the TSP’s financial hardship withdrawal rules for TSP participants affected by Hurricanes Harvey, Irma or Maria that occurred during August and September 2017 and victims of the California Wildfires that occurred during September through November 2017. This column discusses the temporary changes in the TSP financial hardship rules for the victims of these disasters. The column also presents a discussion of the consequences of financial hardship withdrawals.
General Requirements for Receiving a TSP Financial Hardship Withdrawal
A TSP participant who is either employed by the federal government as a federal civilian employee or as a member of the uniformed services is able to request a TSP financial hardship in-service withdrawal if the participant fulfills four requirements. The participant: (1) must have an immediate and significant financial need that necessitates a distribution from the TSP account. The need must arise out of either a recurring negative monthly cash flow situation resulting from a major uninsured medical expense, significant legal expenses caused by separation or divorce, or a personal casualty loss; (2) TSP account must contain at least $1,000 on the participant’s contributions and earnings on those contributions; (3) has not received a financial hardship in-service withdrawal from the same account within the previous six months; and (4) does not have an application pending for an age-based (at least age 59.5) in-service withdrawal or for a TSP loan.
A married TSP participant, even if separated from his or her spouse, must remember a spouse’s rights with respect to a financial hardship withdrawal, as summarized in the following table:
Spouse’s Rights for In-Service Withdrawals
FERS and Uniformed Services
|Spouse must provide written consent to the in-service withdrawal. Spouse’s signature must be notarized.||Exception may be requested if whereabouts are unknown or exceptional circumstances exist.|
|The TSP must notify the spouse of the request for an in-service withdrawal||Exception may be requested if whereabouts are unknown.|
Consequences of TSP Financial Hardship Withdrawals
The TSP will automatically stop an employee’s TSP contributions for the six month period following a financial hardship withdrawal. This means that a FERS-covered employee or a uniformed services member who is covered by the Blended Retirement System (BRS) will not receive agency/service matching contributions during that time. This also means a uniformed service member, either covered by the BRS or not by the BRS, will cease TSP contributions from incentive and special pay including bonuses.
The taxable portion of an employee’s financial hardship withdrawal is subject to federal income tax, and perhaps state and local income tax depending on an employee’s legal residence. An additional 10 percent early withdrawal penalty tax applies if the employee is younger than age 59.5, unless the employee satisfies one of the IRS exceptions to this penalty.
Withdrawals of tax-exempt contributions in a traditional TSP balance and any Roth TSP contribution are not subject to federal and state income taxes. But if an employee has not met the conditions necessary for the employee’s Roth TSP earnings to be “qualified” – that is, to be withdrawn income tax-free – then any Roth TSP earnings included in the financial hardship withdrawal will be subject to federal and state income taxes. Roth TSP earnings become “qualified” when an employee has reached age 59.5 or is permanently disabled, and five years have passed since January 1st of the year of the employee’s first Roth TSP contribution.
The employee permanently depletes his or her TSP retirement savings by the amount of the financial hardship withdrawal plus any future earnings the employee could have received on that amount. In other words, there is no pay back of withdrawn amounts as is the case with a TSP loan.
How the TSP is modifying the hardship withdrawal rules for wildfire and hurricane victims
The TSP is making two changes to the TSP hardship withdrawal rules for TSP participants affected by the California wildfires and Hurricanes Harvey, Irma or Maria which occurred in August through November 2017. TSP participants should visit https://www.fema.gov/disasters for more information about covered disaster areas.
Those TSP participants may make a qualifying financial hardship withdrawal if they: (1) have a primary residence or employment located in a covered disaster area and have incurred a loss as a result of the disasters; or (2) have family members who live or work in a covered disaster area and who have incurred a personal casualty loss, and the TSP participant wants to make a financial hardship withdrawal to assist his or her family members (see www. IRS.gov for eligibility rules for a family member). The modification to the TSP hardship withdrawal rules are: (1) No worksheet need be filled out as part of the financial hardship application process justifying the financial hardship withdrawal; and (2) the TSP will waive the rule prohibiting employee contributions for six months after receiving a hardship withdrawal.
To take advantage of these modified TSP financial hardship withdrawal rules, the TSP participant must do all of the following:
1. Be actively employed as a federal civilian or a member of the uniformed services;
2. Complete Form TSP-76 (Financial Hardship In-Service Withdrawal Request);
3. Write “California wildfires, “Hurricane Harvey”, “Hurricane Irma” or “Hurricane Maria” at the top of page 1 of Form TSP-76 above “name”; and
4. Check the “Personal Casualty Loss” box on page 2 of Form TSP-76 as the reason for requesting financial hardship.
Deadlines for Modified TSP Financial Hardship Withdrawals
In order to request a penalty-free TSP financial hardship withdrawal and not have the TSP participant’s contributions stopped for six months following the financial hardship withdrawal, a TSP participant’s request pertaining to:
• Hurricanes Harvey or Irma must be received by the TSP (address and FAX number are included with the instructions to Form TSP-76) by January 24, 2018. In compliance with IRS guidelines, the distribution must occur before January 31, 2018. Any financial hardship in-service withdrawal request application (Form TSP-76) received after January 24, 2018 will be processed as a standard hardship withdrawal resulting in the TSP participant’s contributions automatically stopping for six months following the financial hardship withdrawal.
• Hurricane Maria and California wildfires must be received by the TSP (address and FAX number are included with the instructions to Form TSP-76) by March 8, 2018. In compliance with IRS guidelines, the distribution must occur before March 15, 2018. Any financial hardship in-service withdrawal application (Form TSP-76) received after March 8, 2018 will be processed as a standard hardship withdrawal resulting in the TSP participant’s contributions automatically stopping for six months following the financial hardship withdrawal.
Those TSP participants under age 59.5 who made qualified TSP financial hardship withdrawals during 2017 or those participants younger than age 59.5 who intend to make qualified TSP financial hardship withdrawals before the 2018 deadlines should be aware that the withdrawals are also not subject to the IRS’ 10 percent early withdrawal penalty. However, federal, and in most states, state income taxes will have to be paid on withdrawn traditional TSP funds and on any Roth TSP earnings coming from nonqualified Roth TSP withdrawals.