Issue Briefs

Following is a rules proposal from the TSP to simplify the process of making what it calls “catch-up contributions”—additional investments beyond the normal annual limit that are allowed for investors who are age 50 or older, or who will be by the end of a given calendar year.

In sum, the rules would end the need to make a separate selection to make the additional investments and amounts above the standard limit would “spill over” and automatically be deemed catch-ups, up to the separate limit allowed for them. The change would be effective in 2021, as the TSP had earlier indicated.

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A catch-up contribution is a contribution that exceeds a statutory limit on the amount of contributions a participant can normally make to the TSP in each calendar year. Congress’s reason for permitting these extra contributions was to allow participants to “catch up” for years when they were not employed or were otherwise unable to contribute toward their retirement.

Normally, a TSP participant’s contributions cannot exceed the statutory limits set forth in Internal Revenue Code (IRC) section 402(g) (limiting the amount of traditional and Roth contributions to $19,500 for calendar year 2020) and IRC section 415(c) (limiting the total amount of traditional, Roth, tax exempt, matching, and automatic 1% contributions to the lesser of 100% of the participant’s compensation or $57,000 for calendar year 2020). Participants who are age 50 or older are allowed to make catch-up contributions beyond these statutory limits—up to the dollar amount in IRC section 414(v), which is $6,500 for calendar year 2020.

Currently, participants who wish to make catch-up contributions are required to submit an election form called “TSP-1-C/TSP-U-1-C, Catch-up Contribution Election” (or electronic equivalent) to their employing agency. The catch-up contribution election form is separate, and in addition to, any other contribution election that a participant may already have on file. Upon receipt of a catch-up contribution election form, the participant’s employing agency begins submitting catch-up contributions to the TSP on the participant’s behalf, using special payroll records designed specifically for catch-up contributions. The payroll records that employing agencies use for submitting catch-up contributions are separate, and in addition to, the payroll records that employing agencies use for submitting other types of contributions.

Proposed Change

The FRTIB proposes to simplify the catch-up contribution process, by no longer requiring participants to submit separate catch-up contribution election forms in addition to their other contribution election forms. Instead, the TSP will simply continue to accept contributions based on the participant’s contribution election that is already on file, until his/her contributions reach the combined limits on catch-up contributions and other types of contributions. Employing agency payroll offices will no longer submit catch-up contributions to the TSP on special payroll records designed specifically for catch-up contributions. Instead, payroll offices will submit catch-up contributions using the same payroll records that they use to submit other types of contributions.

The TSP recordkeeping system will automatically determine, based on the participant’s date of birth, whether the participant is eligible to make catch-up contributions. When an employing agency payroll office submits contributions in excess of the 402(g) limit or the 415(c) limit on behalf of a catch-up eligible participant, the TSP recordkeeping system will automatically treat the excess contributions as catch-up contributions, without requiring any additional paperwork from the participant or any special payroll records from the payroll office.

Proposed Effective Date

The proposed effective date for this change is January 1, 2021.

SECTION-BY-SECTION ANALYSIS

Section 1600.23 Catch-Up Contributions

The FRTIB proposes to amend 5 CFR § 1600.23 by removing paragraph (b), which requires the use of a separate election form for catch-up contribution elections.

The FRTIB also proposes to remove 5 CFR § 1600.23 paragraph (h), which says that catch-up contributions cannot be matched.

The FRTIB codified 5 CFR § 1600.23 paragraph (h) through an interim rule that was published on June 13, 2003. 68 FR 35491.

In the preamble to the interim rule, the FRTIB cited to FERSA section 8432(c)(2) as the rationale for why catch-up contributions cannot be matched. FERSA section 8432(c)(2) says nothing about catch-up contributions——it simply says that matching contributions cannot exceed a dollar-for-dollar match on the first 3% of basic pay that a participant contributes plus 50 cents on the dollar match for the next 2% of basic pay that a participant contributes. Removing the restriction on matching catch-up contributions will not increase an employing agency’s potential outlay for matching contributions as the 5% limit described in the preceding sentence still applies. FERSA section 8432(c)(2) can justify a prohibition on matching catchup contributions only if we assume that a participant will necessarily reach the FERSA section 8432(c)(2) limit on matching contributions before, or at the same time as, he/she reaches the IRC section 402(g) or 415(c) limit on contributions. To whatever extent this assumption was accurate in 2003, it is no longer accurate today. Today, it is not uncommon for a participant to reach one of the IRC’s limits on contributions before he/she reaches FERSA’s limit on matching contributions.

Section 1605.13 Back Pay Awards and Other Retroactive Pay Adjustments

The FRTIB proposes to amend § 1605.13 by making a technical conforming addition to paragraph (c)(2). This paragraph currently says that any corrective contributions attributable to prior years must not exceed the 402(g) limit or the 415(c) limit applicable to those years. The FRTIB proposes to add language making it clear that such contributions also cannot exceed the 414(v) catch-up contribution limit applicable to prior years.

TSP Investors Handbook, New 6th Edition