So far in this series, we have covered the basics of the Thrift Saving Plan, employee and agency contributions, the differences between Traditional and Roth TSP accounts, loans, in-service and post-separation withdrawals, and life annuities, and taxes of post-separation withdrawals and IRS withdrawal penalties. With this current government shutdown, it is appropriate this is the last post in this series about TSP. This post looks at what effect a non-pay status (i.e. a government shutdown) has on your TSP account.
Effect of Non-Pay Status on Your TSP Account
The following looks at the effects a period of non-pay has on TSP loans, contributions, and withdrawals. This applied to civilian employees who are placed in a non-pay status (furlough of LWOP) and for members of uniformed services who are in Ready Reserves and have been given approval by their command to skip scheduled drills, or whose yearly drill schedule is performed over a 1-2-month period.
It does not apply to employees who are in no-pay status performing an assignment with a state or local government agency under provisions of the Intergovernmental Personnel Act, or to those who are in non-pay status serving as full-time officers or employees of a union.
You can’t take a loan while in no-pay status. TSP loan payments are deducted from your pay, so if you aren’t receiving pay, you aren’t eligible for a TSP loan.
If your furlough is expected to last 30 days or less, you can take a TSP loan. On the other hand, if the furlough will be longer than that, you can’t take a loan from your TSP.
If you expect to be furloughed on a periodic basis (i.e. one day per pay period), you can take a loan, but you will be responsible for keeping your loan payments up-to-date.
The Internal Revenue Code (IRC) requires TSP loan payment be repaid in level payments. Payment through regular payroll deduction satisfies this. If your loan isn’t repaid in level payments, the IRC requires TSP to declare it a taxable distribution. Meaning TSP will report your unpaid loan balance (including accrued interest) as income to you. Further, you must pay tax on the amount and if you’re under age 59 ½ you may also be subject to an additional 10% tax penalty.
Although, tax-exempt and Roth contributions that may be included in the distribution are not subject to tax, any Roth earnings included in the distribution will be subject to federal income tax, even if you have already met the conditions necessary for your Roth to be qualified.
The reasons stated above are why it’s very important for you to be sure that your furlough will not last more than 30 days. Otherwise, be prepared to make regular loan payments from your own funds and you could face severe tax consequences if the furlough lasts longer.
Outstanding Loan When Placed in Non-Pay Status
Because TSP loan payments are made through payroll deductions, a period without pay will result in missed payments (unless made directly from your own funds). If you go into approved non-pay status, the IRC allows you to suspend TSP loan payments up to one year of the non-pay period. This isn’t automatic, so you must provide TSP with the proper documentation.
Note: If you are a civilian entering non-pay status to perform military service, you can suspend payments on your loan until you return to pay status, even if your civilian non-pay status lasts longer than a year. This is because you can’t repay your civilian payments from uniformed service pay.
Your agency may choose to do this by putting you on a furlough that requires you to work fewer hours. Agencies do this because it reduces the financial impact on you and lessens the disruption to the agency. It may still cause you to not have sufficient pay to cover deductions. When this happens, agencies must follow an order of precedence to determine which deductions get processed. The order is:
- Social Security
- Medicare Tax
- Federal Income Tax
- Health Insurance and any other deductions
- TSP Loans
Therefore, furloughed employees for a discontinuous period may not have enough gross pay for the agency to make TSP loan payment deductions and you may fall behind on payments. Agencies aren’t permitted to submit partial loan payments.
TSP will notify you is you’ve missed more than 2 ½ loan payments at the end of a calendar quarter. This notice provides you with the amount needed to bring your loan up-to-date. If you don’t submit payment by the required date, the unpaid balance (including interest accrued) will be declared a taxable distribution and you could incur the 10% early withdrawal penalty.
You need to notify TSP of non-pay status only if your non-pay is expected to last, or has been extended more than 30 days.
Failure to Notify TSP of Non-Pay Status
If neither you nor your agency notifies TSP of a non-pay status, your loan is considered closed, and you can’t repay it. Also, for 12 months following the date of the taxable distribution, you aren’t eligible to apply for another loan from the account.
While in a non-pay status, if you receive miscellaneous civilian basic pay (medical, annual, or military leave) in an amount large enough to cover a loan payment, your agency may deduct a loan payment from that.
Non-Pay Status Longer Than a Year and Loans
TSP loan payments must resume at the end of one year of non-pay status, even if you still haven’t returned to pay status unless it’s for active military duty. Your loan will automatically re-amortize at the end of a calendar quarter following the expiration of your one-year limit. Once you receive confirmation of this, you must make loan payments directly to TSP from your personal funds.
You are not allowed to contribute to TSP while in a non-pay status. These deductions must be made from civilian or uniformed service pay. If you are a civilian employee in non-pay status to perform military service, you may make contributions to your uniformed services TSP account. You may also be titled to make up TSP contributions to your civilian account when you return to civilian pay status.
Receiving Workers’ Compensation
Workers’ Compensation are payments made by OWCP and by law, aren’t payments from which TSP contributions can be made. Also, while you are in a non-pay status, you can’t contribute to TSP or make loan payments from OWCP benefits.
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