The Federal Retirement Thrift Investment Board (FRTIB) last week issued a proposal to amend its regulations to provide Thrift Savings Plan (TSP) participants with additional withdrawal options and flexibility, effective September 15, 2019.
The FRTIB administers the Thrift Savings Plan (TSP) and is proposing the changes as part of the TSP Modernization Act of 2017.
Below are the highlights to the proposed rule changes provided on the Federal Register on June 10. The FRTIB is receiving comments through August 9, 2019.
Unlimited Partial Post-Separation Withdrawals
Currently, a TSP participant is limited to one partial post-separation withdrawal per account, unless he or she previously took an age-based, in-service withdrawal from that account. A participant who has previously taken an age-based, in-service withdrawal may not take a partial post-separation withdrawal.
As required by the Act, the FRTIB is proposing to eliminate the restriction on partial post-separation withdrawals for participants who have taken age-based, in-service withdrawals. Further, in light of the elimination of the full withdrawal requirement discussed in more detail below, the FRTIB proposes to allow all separated participants to take as many partial post-separation withdrawals as desired. In order to avoid inadvertently processing duplicate withdrawal requests, the only limitation on this flexibility is that only one post-separation withdrawal request will be processed during any 30-calendar-day period. A TSP participant with more than one account must make separate post-separation withdrawal requests for each account and the 30-calendar-day period will apply separately to each account.
A participant will be able to elect to receive any partial post-separation withdrawal in the form of a single sum payment, installment payments, a life annuity, or any combination of these options. However, a participant may only have one installment payment series in place per account at any given time.
Additional Installment Payment Options
Currently, a separated TSP participant may elect to receive all or a portion of his or her account balance in the form of fixed dollar monthly payments or monthly payments calculated based on life expectancy. TSP participants are permitted to change the amount of monthly payments (including a one-time election to change from monthly payments calculated based on life expectancy to fixed dollar monthly payments) during an annual open Start Printed Page 26770season between October 1 and December 15.
The FRTIB proposes to make the following changes to its existing installment payment options. First, TSP participants will be permitted to elect to receive installment payments on an annual or quarterly basis, as well as on a monthly basis.
Second, a TSP participant may change the amount and frequency of his or her installment payments at any time throughout the year. This includes the ability of a participant to make a one-time election to change from installment payments calculated based on life expectancy to fixed dollar installment payments. As is currently the case, once a participant makes an election to receive fixed dollar installment payments, he or she may not switch to life-expectancy-based installment payments.
Third, under the new rules, a TSP participant receiving installment payments may stop these payments at any time without receiving the remainder of his or her account in a final withdrawal.
Finally, a TSP participant receiving installment payments may elect to receive some or all of his or her remaining account balance in the form of a single sum payment, an annuity, or a combination of these options.
Traditional, Roth, or Pro Rata
Under existing rules, all post-separation withdrawals are taken from a participant’s traditional and Roth balances on a pro rata basis. Under the proposed rules, a participant would still be permitted to use this method, but would also have the option to take his or her withdrawal only from the Roth balance or only from the traditional balance. If a participant elects to receive installment payments from either his or her Roth balance only or traditional balance only, payments will automatically continue from the non-elected balance once the elected balance has been depleted unless the participant elects to stop or change installment payments.
The FRTIB is proposing to update its rules to clarify how spousal rights will apply in light of the new post-separation withdrawal options. Specifically, spousal consent, in the case of a married Federal Employees’ Retirement System (FERS) or uniformed services participant, or spousal notification, in the case of a married Civil Service Retirement System (CSRS) participant, is generally required every time a married participant makes a post-separation withdrawal election in any form other than a joint life annuity with a 50 percent survivor benefit, level payments, and no cash refund. In addition, spousal consent or notification, as appropriate, is required when a married participant elects to change the amount or frequency of his or her installment payments.
Age-Based, In-Service Withdrawals
Currently, a TSP participant who is 59-1/2 or older and not separated from federal service may make a one-time election to receive all or part of his account balance in a single sum payment. The FRTIB is proposing to permit participants to take up to four age-based, in-service withdrawals per calendar year. The 30-calendar-day processing period applicable to partial post-separation withdrawals will also apply. For participants with more than one TSP account, these limits apply separately to each account.
Currently when a participant takes a hardship withdrawal, his or her TSP contributions are suspended for a period of six months after the withdrawal is processed. After the expiration of the six-month period, the participant may restart contributions by submitting a new TSP contribution election. Contributions are not restarted automatically.
Under the proposed rule, any six-month suspension period in effect will automatically expire on September 15, 2019 and affected participants may restart contributions by submitting a new TSP contribution election. In addition, a participant who takes a hardship withdrawals on or after September 15, 2019 will not have his or her TSP contributions suspended.
Traditional, Roth, or Pro Rata
Under existing rules, all in-service withdrawals are taken from a participant’s traditional and Roth balances on a pro rata basis. Under the proposed rules, a participant would still be permitted to use this method, but would also have the option to take his or her withdrawal only from the Roth balance or only from the traditional balance.
The FRTIB is proposing to update its rules to clarify how spousal rights will apply in light of the changes to its in-service withdrawal options. Specifically, spousal consent, in the case of a married FERS or uniformed services participant, or spousal notification, in the case of a married CSRS participant, is generally required every time a married participant makes an in-service withdrawal election.
Elimination of Full Withdrawal Election Requirement
Historically, TSP rules required a participant to make an election to begin receiving monthly payments, purchase a life annuity, withdraw his/her account balance in a single payment, or use a combination of these three options (a “Full Withdrawal Election”) no later than April 1 of the year following the year in which the participant reaches age 701/2 and is separated from federal service (the “Full Withdrawal Deadline”). If a TSP participant failed to make a Full Withdrawal Election by the Full Withdrawal Deadline, the TSP initiated an account abandonment process in the year in which the Full Withdrawal Deadline occurred.
In addition to the TSP’s Full Withdrawal Election rules, Internal Revenue Service (“IRS”) rules regarding required minimum distributions (“RMDs”) apply to TSP participants. Under IRS rules, a TSP participant must receive RMDs beginning on April 1 of the year following the year in which the participant reaches age 701/2 and is separated from service (the “Required Beginning Date”) and annually thereafter.
As required by the IRS RMD rules, the TSP distributed the first RMD payment to each participant by his/her Required Beginning Date regardless of whether the participant has made a Full Withdrawal Election. However, because the accounts of participants who failed to make a Full Withdrawal Election by the Full Withdrawal Deadline were abandoned later that same year, the TSP did not (and was not required to) make any additional RMD payments to those participants.
Effective January 1, 2019, the FRTIB ceased the abandonment of accounts for participants who have reached age 701/2 and separated from federal service but have not made Full Withdrawal Elections by the Full Withdrawal Deadline and is proposing to amend its regulations to reflect this change. Stopping the abandonment process means that participants who otherwise would have had their accounts abandoned in 2019 will no longer be abandoned and will be poised to take advantage of the additional withdrawal options that will be available on September 15, 2019.Start Printed Page 26771
As a result of the elimination of the account abandonment process, the FRTIB will automatically distribute IRS RMDs each year to all affected participants, regardless of whether they have made Full Withdrawal Elections.
In addition, the FRTIB is proposing certain non-substantive clarifications to its rules regarding IRS RMDs to beneficiary participants. Beneficiary participants are not subject to the Full Withdrawal Election rules.