Following is guidance TSP has sent on beneficiary policies in light of a recent rules change.
I. Entitlement
A. If a participant dies before completing a TSP withdrawal election, the TSP account will be paid according to the statutory order of precedence set forth in 5 U.S.C. § 8424(d). That is, the account will be paid:
1. To the beneficiary (or beneficiaries) designated by the participant on a properly completed and filed Form TSP-3, Designation of Beneficiary (as described in 5 CFR § 1651.3 through 1651.4);
2. If there is no designated beneficiary, to the widow or widower (as described in 5 CFR § 1651.5);
3. If none, to the child or children and descendants of deceased children by representation (as described in 5 CFR § 1651.6);
4. If none, to the surviving parent or parents (as described in 5 CFR § 1651.7);
5. If none, to the duly appointed executor or administrator of the estate (as described in 5 CFR § 1651.8); or
6. If none, to the next of kin who is entitled under the laws of the participant’s domicile on the date of the participant’s death (as described in 5 CFR § 1651.9).
B. If a participant dies after submitting a valid TSP withdrawal election, the TSP account will be paid according to the conditions specified in 5 CFR § 1651.2(b).
C. A will may not be used to designate a beneficiary of a TSP account. (See 5 CFR § 1651.3(d).)
D. Because entitlement to a TSP death benefit payment is created at the time of the participant’s death, the following rules apply:
A participant may designate a contingent beneficiary(ies) for each primary beneficiary. The contingent beneficiary(ies) will share a portion of the TSP account designated for a specific primary beneficiary who dies before the participant.
1. If a beneficiary designated by a participant on Form TSP-3 dies before the participant, the beneficiary’s share will be paid to any contingent beneficiary(ies) designated by the participant. If there are no contingent beneficiaries, the deceased beneficiary’s share will be paid to the other designated beneficiaries in proportion to the shares designated by the participant. If there are no designated beneficiaries or contingent beneficiaries who survive the participant, the account will be paid according to the statutory order of precedence described in Section A above.
2. If a beneficiary dies at the same time as the participant, the beneficiary will be treated as if he or she had died before the participant.
3. If a beneficiary dies after the participant but before payment is made, the beneficiary’s share will be paid to the beneficiary’s estate.
4. If a trust is designated by a participant on Form TSP-3 and it is not in existence on the date the participant dies or if it is not created upon the participant’s death, the account will be paid to the other designated beneficiaries or their contingents. If there are no other designated beneficiaries, the account will be paid according to the statutory order of precedence described in Section A above.
II. Method of Payment
A.Spousal Beneficiaries
A surviving spouse who is entitled to receive all or a part of a deceased participant’s TSP account will have his or her entire death benefit automatically deposited into a Beneficiary Participant Account (BPA).
1. When the TSP establishes a BPA, the account balance will be invested solely in the Government Securities Investment (G) Fund. Once the account is established, the beneficiary participant may request interfund transfers to redistribute his or her account balance among any of the Lifecycle (L) or individual funds, just like other participants.
2. The beneficiary participant can request a partial withdrawal or a full withdrawal (a single payment, monthly payments, a TSP life annuity, or a combination of any of these three options). All withdrawal options for beneficiary participants (including the partial withdrawal option) must be submitted on Form TSP-90, Withdrawal Request for Beneficiary Participants . All withdrawals will be disbursed pro rata (proportionally) from any traditional (tax-deferred) and Roth balances in the participant’s account. Any money that is disbursed from the traditional balance will be subject to mandatory Federal income tax withholding. If the participant was a uniformed services member with tax-exempt contributions in a traditional balance, those contributions will not be subject to tax, but the earnings on those contributions will be subject to tax. In addition, any Roth contributions that may be part of a withdrawal are not subject to Federal income tax. Earnings on Roth contributions may also be paid tax-free if 5 years have passed since January 1 of the year the deceased participant made his or her first Roth contribution.
3. The beneficiary participant may transfer or roll over part or all of his or her BPA into an IRA or eligible employer plan. However, the beneficiary participant may not transfer or roll over funds from IRAs or other retirement plans into his or her BPA. If the beneficiary participant has an existing TSP account based on his or her own employment with the Federal Government or the uniformed services, he or she may transfer the BPA into his or her existing TSP account. However, tax-exempt money in the BPA cannot be transferred into a civilian TSP account.
4. The beneficiary participant is required to begin receiving annual distributions from his or her BPA according to the Internal Revenue Code (IRC) required minimum distribution (RMD) rules. The date on which the beneficiary participant must begin receiving RMDs depends on whether the deceased participant died before or on/after his or her “required beginning date.” For more information, see the tax notice, “Tax Information About TSP Withdrawals and Required Minimum Distributions for Beneficiary Participants.”
5. In the event of the death of a beneficiary participant, the funds in the BPA cannot remain in the TSP. The account will be distributed directly to the BPA participant’s beneficiary(ies) indicated on Form TSP-3. If no valid Form TSP-3 is on file, the account will be distributed according to the order of precedence as described in Section I above. Death benefit payments made from a BPA must be paid directly to beneficiary(ies). These payments are subject to certain tax restrictions and cannot be transferred or rolled over into an IRA or eligible employer plan. In addition, these payments will be fully taxable in the year the beneficiary(ies) receives them. Any payments from tax-exempt money are not subject to taxes when distributed.
6. The TSP has two booklets for BPA participants — Your TSP Account: A Guide for Beneficiary Participants andManaging Your Account for Beneficiary Participants . These booklets and Form TSP-90 are included in the Welcome Letter that is sent to each spouse beneficiary at the time his or her account is established. They are also available on the TSP website, www.tsp.gov.
B. Non-Spousal Beneficiaries
Non-spouse beneficiaries have two options for receiving their death benefit, both of which are described below. The TSP has developed Form TSP-81, Death Benefits Election for a Beneficiary Other Than a Spouse, which will be sent to non-spouse beneficiaries prior to the payment of their death benefits.
1. Single Payment
If a beneficiary is not the surviving spouse, the beneficiary may receive the death benefit directly as a single payment. Like BPA withdrawals described in Part A3 above, all death benefit payments will be disbursed pro rata from any traditional (tax-deferred) and Roth balances in the participant’s account.
2. Inherited IRA
A non-spouse beneficiary can avoid withholding and tax liability by requesting that the TSP transfer all or part of the payment directly into an “inherited” IRA. Inherited IRAs may provide significant tax benefits because their required distributions can generally be spread across the lifetime of the beneficiary.
We strongly recommend that beneficiaries discuss this option with their tax or financial advisors or IRA providers before deciding on it. Inherited IRAs must be specifically titled as such (and established in the name of the deceased TSP participant, not in the beneficiary’s name), and there are specific time frames for beginning distributions. In addition, inherited IRAs may have other restrictions if the deceased participant had reached age 70½ and was already subject to the Internal Revenue Service’s (IRS) required minimum distribution rules. There may be severe tax consequences if the inherited IRA is not set up correctly. Therefore, beneficiaries should ensure that their inherited IRAs are correctly established before the death benefit payments are disbursed.
3. More information on death benefit payments, inherited IRAs, and taxes associated with TSP disbursements may be found on the TSP website, the TSP booklet Death Benefits , and the tax notice “Important Tax Information About Thrift Savings Plan Death Benefit Payments.”
III. Form TSP-3, Designation of Beneficiary
A. Purpose of Form TSP-3
Form TSP-3, Designation of Beneficiary , provides active, separated, and beneficiary participants the ability to designate a beneficiary(ies) to receive their TSP accounts after their death. If the TSP has a valid Form TSP-3 on file on or before the date of the participant’s death, the TSP will use the form to identify the participant’s beneficiary(ies) and disburse the death benefit payments from his or her TSP account(s). Form TSP-3 allows participants with both civilian and uniformed services TSP accounts who wish to designate the same beneficiary(ies) for both accounts to submit one form, saving the participant both time and paper (See Section D2 below). Form TSP-3 is also used by beneficiary participants to designate beneficiary(ies).
B. Background
1. Prior to 1995, active Federal employees were required to submit Forms TSP-3 to the personnel office at their employing agency, where they were filed in the employee’s Official Personnel Folder (OPF). Upon a participant’s death or separation from service, the employing agency would forward the participant’s Form TSP-3 to the TSP recordkeeper. Beginning on January 1, 1995, the TSP required all participants to mail or fax beneficiary designation forms directly to the TSP recordkeeper in compliance with 5 CFR § 1651.3(c)(1). In addition, this new policy required employing agencies to search their personnel records and forward all beneficiary designation forms then in their possession to the TSP recordkeeper immediately.
2. Since September 1995, the TSP has required that all completed Forms TSP-3 must be received by the TSP on or before the date of the participant’s death in order to be considered.
The TSP reminds agency representatives that it will NOT honor a Form TSP-3 received after the participant’s date of death, even if it was on file with the agency on or before the participant’s date of death.
3. On July 9, 2014, the TSP Death Benefit regulations at 5 CFR § 1651.3(c)(8) were changed to state that a Form TSP-3 is valid only if it is received by the TSP recordkeeper not more than 365 calendar days after the date of the participant’s signature on the form. Consequently, if a Form TSP-3 with a signature that is more than 365 calendar days old is found in an OPF, the agency/service should not submit it to the TSP. Instead, the agency should make every effort to locate the participant and inform him or her that the Designation of Beneficiary form is invalid, and that he or she should submit a new TSP-3 directly to the TSP.
C. Agency Responsibilities
1. Agencies must provide Form TSP-3 upon a participant’s request. Agencies that enclose Form TSP-3 in orientation packets should use the most recent version of the form (see Item 3 below) and caution new employees not to submit the form until they receive confirmation that their TSP account has been established. If the TSP recordkeeper receives a Designation of Beneficiary form from an employee who does not yet have a TSP account, the form will be returned to the employee.
Although agencies are required to provide Form TSP-3 upon request, agencies must not accept the completed form from the participant. Instead, they must direct the participant to mail, or preferably fax, the completed form to the TSP for processing.
2. Agency/service representatives should refer questions from potential beneficiaries or family members of a deceased participant to the TSP:
1-TSP-YOU-FRST (1-877-968-3778)
1-TSP-THRIFT5 (1-877-847-4385)
(for hearing-impaired individuals)
3. Agencies that provide employees with paper copies of Form TSP-3 or post electronic copies for download must establish procedures to ensure that they are providing the most current version of the form and that obsolete editions are destroyed (recycled) or removed from their sites.
D. Participant Responsibilities
1. Participants are responsible for following the instructions provided with Form TSP-3 to ensure that it is completed correctly and that it accurately reflects their beneficiary designations.
2. The TSP must receive a Participant’s Form TSP-3 on or before the date of their death, and no more than 365 calendar days after it is signed. The address and fax number participants may use is provided below:
Thrift Savings Plan
P.O. Box 385021
Birmingham, AL 35238
Fax: 1-866-817-5023
