Each year, in accordance with Internal Revenue Code (IRC) Section 402, the IRS announces a limit on the amount that employees can contribute to their employer-sponsored defined contribution plans. These defined contribution plans include 401(k), 403(b), 457 retirement plans and the traditional and Roth Thrift Savings Plan (TSP).
This column discusses how this limit, called the IRS’ elective deferral limit, affects TSP matching contributions made to the accounts of Federal Employees Retirement System (FERS) employees. The column also discusses how a FERS employee could lose some or all matching TSP contributions from his or her agency if the employee were to accelerate the elective deferrals early in the calendar year.
What are elective deferrals and what are their effect on agency matching contributions?
Elective deferrals are the dollar amounts that an employee asks his or her employer to deduct from his or her salary and that the employer in turn contributes on behalf of that employee to an employer-sponsored qualified retirement plan.
All before-taxed contributions that a federal employee contributes to the traditional TSP and all after-taxed TSP contributions that a federal employee contributes to the Roth TSP constitute elective deferrals and limited each year by the annual elective deferral limit.
Note the combined total of a federal employee’s before-taxed traditional TSP and after-taxed Roth TSP contributions (but excluding “catch-up” contributions) cannot exceed the elective deferral limit in any year.
For calendar year 2020, the elective deferral limit increases from $19,000 that it was during 2019 to $19,500.
Elective deferrals do not include agency automatic (one percent of gross pay) contributions and agency TSP matching contributions (maximum of four percent) because those contributions are not considered part of an employee’s salary. For members of the uniformed services, elective deferrals do not include traditional contributions from tax-exempt pay earned in a combat zone.
If a federal employee contributes to a civilian TSP account and also contributes to a uniform services TSP account while on active duty, then the annual elective deferral limit applies to the total TSP contributions made to both accounts.
When a FERS-covered employee reaches the annual elective deferral limit during the calendar year, the employee is prohibited from contributing to either the traditional account or to the Roth TSP account for the remainder of that calendar year. The TSP system will not allow any employee contributions to be processed that will cause the total amount of employee contributions to exceed the annual elective deferral limit. The employee’s payroll office must ensure that the employee contributions automatically resume effective the first pay date in January of the following calendar year.
Those FERS-covered employees who reach the annual elective deferral limit during the year will have their agency matching contributions (but not the automatic one percent of gross pay contribution) suspended for the remainder of the year. The reason is that the agency matching contributions are based on the amount of employee contributions made each pay date. If there are no employee contributions on a particular pay date, then there can be no agency matching contributions. However, the agency automatic contributions – that is, one percent of the employee’s gross pay – will continue if the employee reaches the annual elective deferral limit during the year. This is because the agency automatic contribution is not based on an employee’s contributions. But FERS employees certainly do not want miss out on any agency TSP matching contributions.
How FERS employees can receive maximum agency matching contributions
To receive the maximum agency matching contributions, a FERS employee must contribute at least five percent of the basic pay that the employee earns each pay period during the year. This recommended contribution strategy also applies to uniformed service members who are enrolled in the Blended Retirement System (BRS). FERS-covered employees and uniformed service members enrolled in the BRS should use the following worksheet to determine a dollar amount an employee can contribute each pay date so that the employee’s contributions are spaced out over the calendar year 2020:
The effect of catch-up contributions on the elective deferral limit
Catch-up contributions are payroll deductions that TSP participants who are over age 49 as of Dec. 31 in any year may be eligible to make in addition to regular employee or uniformed service member contributions that are subject to the elective deferral limit. An employee or uniformed service member has to make a separate election each year to make “catch-up” contributions.
Catch-up contributions do not count against the annual elective deferral limit. But the Internal Revenue Code limits the total amount of elective deferrals and catch-up contributions an employee can make. For 2020, total contribution cannot exceed $26,000; that is, $19,500 in elective deferrals and $6,500 in catch-up contributions.
How the TSP applies the elective deferral and catch-up contribution limit for an employer who contributes to both a civilian and a uniform services TSP account
Both the elective deferral limit and the catch-up limit apply to the total contributions an employee makes to a civilian and to a uniformed services TSP account if the employee participates in both accounts. During the year, the TSP will apply the limit to each account separately and not allow an employee to contribute an amount to either account that exceeds the elective deferral limit.
In January of the year following the year in which the employee contributed to both accounts, the TSP will check to see whether the employee’s combined contributions to both accounts exceeded the elective deferral limit and if the employee is over age 49, the catch-up limit. If the employee did exceed the limits during the year, then the TSP will return any excess contributions along with the attributable earnings on those contributions. The TSP will return excess contributions and earnings first from contributions made to the uniformed services TSP account. If an employee made both traditional and Roth TSP contributions during the year, then the TSP will return excess contributions and associated earnings in a proportional amount from the traditional and Roth TSP balances. The TSP will apply the same process to catch-up contributions made to both accounts that exceed the separate “catch-up” contribution limit.
Finally, tax-exempt contributions made to the traditional TSP of a uniformed services account while the uniformed service member was deployed to a designated combat zone do not count toward the elective deferral limit. But any Roth TSP contributions are subject to the elective deferral limit even if the contributions are made from tax-exempt compensation. Roth catch-up contributions made while earning tax-exempt pay in a combat zone will also apply toward the annual catch-up contribution limit.