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Federal Employees Need to Be Careful in Contributing Their Salaries to the TSP

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Edward A. Zurndorfer, Certified Financial Planner

Each year, most federal employees decide how much of their salaries they want to allocate to the Thrift Savings Plan (TSP).

Employees may contribute to the TSP directly (via payroll deduction) in one of two ways, namely:

(1) "regular" contributions and

(2) "catch up" contributions for those employees who will be at least age 50 by December 31. For the year 2010, every federal employee -- no matter which retirement system an employee is covered by which are CSRS, CSRS-Offset, or FERS -- may contribute to the TSP a maximum $16,500 ("regular" contributions). An additional $5,500 in "catch-up" contributions are allowed for those employees who will be at least age 50 by Dec. 31, 2010 and who contribute the full $16,500 "regular" contributions during the year.

The $16,500 is termed the IRS' elective deferral limit ($16,500 was the same limit for 2009). If an employee had elected to contribute the maximum $16,500 to the TSP during 2009, then the same $16,500 would be automatically contributed during 2010 without any additional action by the employee. However, an employee must formally elect each year to make "catch-up" contributions.

Only employee contributions are included in the annual elective deferral limit. Elective deferrals do not include agency automatic contributions (one percent of the employee's gross pay), partial agency matching on employee contributions, or "catch-up" contributions. Note that only FERS employees receive agency automatic contributions and matching contributions which are not considered part of an employee's gross salary.

Section 402 of the Internal Revenue Code sets a limit -- called the annual elective deferral limit -- which an employee may contribute via payroll deduction to all defined contribution plans that an employee participates in during any given calendar year. Defined contribution plans include 401(k) plans, 403(b) plans and the TSP.

When the annual elective deferral limit is reached, an employee's contributions will be suspended for the remainder of the calendar year. The TSP system will not allow any employee payroll contribution to be processed that will cause the total amount of employee contributions for the year to exceed the annual deferral limit. But what happens if an employee participates during the year in more than one defined contribution plan? For example, a federal employee is also a member of the Ready Reserve and contributes to the TSP as a federal employee. The employee also contributes to the TSP as a member of the uniformed services. In that case, it is the responsibility of the employee to ensure that the total contributions do not exceed the annual elective deferral limit. For example, if the employee during 2009 or 2010 contributes $3,000 to the TSP as a member of the uniformed services, then the employee may contribute during 2009 or 2010 no more than $13,500 to the TSP as a civilian employee.

If an employee has contributed an excess deferral amount to the TSP and to another defined contribution plan during the year, then the employee needs to request - in a timely manner - a refund of any excess deferrals from one or more of the plans in which the employee participates. Any plan that has been contacted by the employee will return excess deferrals plus associated earnings by April 15 of the year following the year in which the deferrals were made. To request a refund of excess deferrals and associated earnings from the TSP, the employee must request and complete form Request for Return of Excess Employee Contributions to Participant by calling the TSP at 1-877-968-3778 or 404-233-4400 if the employee lives outside the United States and Canada. The completed form must be sent to the TSP no later than March 31 of the year after the excess deferral was made. The return address is on the form. The TSP will process the refund and reimburse the employee before April 15. Forms received after March 31 will not be processed.

If an employee contributes more than the elective deferral limit in any one year through participation in more than one defined contribution plan, then the excess deferrals must be treated as income in the year the contributions are made. Note that this is the case whether or not the excess contributions are refunded. The total amount of retirement plan contributions -- commonly called deferred compensation -- is reported to the employee in box 13 of the employee's Form W-2. If the employee has made excess retirement plan contributions (deferrals) then the employee must report on his or her federal and state income tax return as taxable wages the total amount of the excess contributions for the year in which the employee made the excess deferrals.

Those employees who elect to receive excess deferrals as a refund from the TSP will receive IRS Form 1099-R which indicates the amount of the excess deferrals that were refunded. Those employees who have filed their income taxes but who have not reported any excess deferrals as taxable wages will need to amend their taxes and report the excess deferrals for the year of excess deferrals.

Earnings that are distributed with excess deferrals are considered taxable income in the year in which they are distributed. This is unlike the excess deferrals themselves -- contributions via payroll deduction are considered taxable income in the year they are contributed. The income which includes interest, dividends, and /or capital gains will be included on the employee's tax return for the year the income is received.

The employee's agency will be notified by the TSP of the employee's request for a refund of the excess deferrals and associated earnings. The agency is then required to remove from the TSP any agency matching contributions associated with these excess deferrals.

The distribution of the excess deferrals to the TSP to the employee will not be considered as an early withdrawal from the TSP if the distribution is made by April 15 of the tax year following the year in which the excess deferral was made. It will therefore not be subject to the IRS' 10 percent early withdrawal (pre-age 59.5) penalty.

If an employee reaches the annual elective deferral limit for the year, then the employee contributions must be suspended for the remainder of the calendar year. The TSP system will not allow any employee contributions to be processed that will cause the total amount of employee contributions for the year to exceed the annual limit.

FERS employees who reach the annual elective deferral limit before the last pay date of December will also lose out on any agency matching contributions for the remainder of the calendar year. Agency matching contributions -- but not the automatic one percent of an employee's basic pay -- are based upon the amount of employee contributions that are made each pay date. If there are no employee contributions on a given pay date, then there can be no agency matching contributions.

In order for a FERS employee to receive the maximum agency matching contribution for the year, the employee must contribute at least four percent of his of her base pay each pay date. There are usually 26 pay dates but sometimes 27 pay dates per year. A FERS employee is entitled to receive agency automatic one percent of base pay contributions whether or not the employee contributes.

To ensure that the FERS employees do not miss out on matching, the TSP has provided the following worksheet for these employees. To download the worksheet (1-page PDF) click here

The worksheet is also found on the TSP website at The Official TSP Home Page, maintained by FRTIB; 2008-05-22

About the Author

Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is a seminar speaker at federal employee retirement seminars throughout the country for the National Institute of Transition Planning, Inc. , and an author of numerous publications on federal employee benefits.

Posted with Permission from: MyFederalRetirement.com



Federal Employees Need to Be Careful in Contributing Their Salaries to the TSP
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