Fedweek

A TSP loan would still have to be repaid in order to avoid the loan being declared a taxable distribution but offers at least one way to cover obligations in the event of another shutdown

The TSP has repealed its restriction against taking out loans for employees in non-pay status due to a partial government shutdown, “effective immediately so these participants will have access TSP loans in the event of another government shutdown.”

The loan program “was not designed to replace the salaries of federal employees. A TSP loan is not a costless alternative to paying federal employees for their work,” it said in announcing the change. “TSP participants who take loans may miss out on the investment earnings that would have accrued if that money had remained their retirement accounts. A TSP loan will still have to be repaid in order to avoid the loan being declared a taxable distribution. Nevertheless, the [TSP] is publishing this interim rule in the hopes that it might provide some assistance to TSP participants in the event of another government shutdown.”

The TSP’s long-standing policy has been that loans cannot be taken out while in non-pay status since they are repaid through payroll withholding, which cannot occur if there is no pay to be withheld from. However, the TSP had informally allowed an exception during the shutdown on grounds that employees would soon be paid. The new interim rule formalizes that exception.

The February 5 Federal Register notice adds that those in non-pay status for other reasons–such as administrative furlough, voluntary leave of absence,  seasonal work, sabbatical or disciplinary suspension–remain ineligible to request a loan. The notice said the TSP is reconsidering that policy as well and will address it when final rules are issued.

A report presented at last week’s meeting of the TSP governing board showed that in response to the partial shutdown, loans increased by 5 percent and hardship withdrawals increased by 26 percent in comparison with the same period a year before.