The TSP has proposed to make certain expenses related to a natural disaster automatically eligible for in-service “financial hardship” withdrawals, a change it said is needed because of a recent decision by the IRS.
The TSP has allowed hardship withdrawals on a case by cases basis when the IRS has allowed them from 401(k) plans due to disasters such as flooding, hurricanes and wildfires.
That has occurred several times in recent years, with a set period each time in which such withdrawals are allowed.
However, the IRS recently said it will no longer make such announcements and instead added natural disasters to a list of situations in which withdrawals are allowed under the so-called “safe harbor” rule.
The TSP’s proposed rules would make eligible for financial hardship withdrawals any expenses and losses, including loss of income, resulting from a natural disaster declared by the Federal Emergency Management Agency.
Separately, the TSP has proposed rules to carry out an earlier announced intention to raise the default contribution rate from 3 percent to 5 percent of salary for those newly hired starting October 1. The change is designed to trigger the maximum government contribution for those employees.
The notice says that a quarter of FERS participants are investing less than 5 percent and that raising it to that level “not only increases the amount that a participant saves from his or her basic pay, but also ensures that that participant receives the full amount of agency/service matching contributions he or she is entitled to, both of which will allow the participant, everything else being equal, to achieve significantly greater retirement savings.”
The change will not affect those who have continued to invest at the 3 percent default rate since being hired. Default investments are directed into the lifecycle L fund deemed appropriate for the person’s age assuming retirement at age 62. The account holder can change both the amount and the fund choice at any time.
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