[Federal Register Volume 66, Number 161 (Monday, August 20, 2001)]
[Rules and Regulations]
[Pages 43461-43463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20862]
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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
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Federal Register / Vol. 66, No. 161 / Monday, August 20, 2001 / Rules
and Regulations
[[Page 43461]]
FEDERAL RETIREMENT THRIFT INVESTMENT BOARD
5 CFR Part 1650
Methods of Withdrawing Funds From the Thrift Savings Plan
AGENCY: Federal Retirement Thrift Investment Board.
ACTION: Final rule.
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SUMMARY: The Executive Director of the Federal Retirement Thrift
Investment Board (Board) is amending the regulations on methods of
withdrawing funds from the Thrift Savings Plan (TSP) to eliminate the
option to transfer a financial hardship in-service withdrawal to an
individual retirement account (IRA) or other eligible retirement plan.
This is consistent with the Internal Revenue Code's rules for similar
distributions from private sector plans. The amendment also
incorporates administrative changes in calculating the amount of a
financial hardship withdrawal.
EFFECTIVE DATE: August 20, 2001.
FOR FURTHER INFORMATION CONTACT: Salomon Gomez on (202) 942-1661;
Merritt A. Willing on (202) 942-1666; or Patrick J. Forrest on (202)
942-1659. FAX (202) 942-1676.
SUPPLEMENTARY INFORMATION: The Board administers the TSP, which was
established by the Federal Employees' Retirement System Act of 1986
(FERSA), Public Law 99-335, 100 Stat. 514, which has been codified, as
amended, largely at 5 U.S.C. 8351 and 8401-8479. The TSP is a tax-
deferred retirement savings plan for Federal employees, which is
similar to cash or deferred arrangements established under section
401(k) of the Internal Revenue Code (I.R.C.) (26 U.S.C. 401(k)). The
TSP is qualified under section 7701(j) of the I.R.C. (26 U.S.C.
7701(j)). Sums in the TSP are held in trust for the TSP participant.
Analysis
Part 1650 was first published in final form in the Federal Register
on September 18, 1997 (62 FR 49112), and was subsequently amended by a
final rule published in the Federal Register on June 9, 1999 (64 FR
31052). On July 12, 2001, the Board published a proposed rule with a
request for comments in the Federal Register (66 FR 36494) to eliminate
the option to transfer a financial hardship in-service withdrawal to an
individual retirement account (IRA) or other eligible retirement plan.
The Board received no comments; accordingly, the Board adopts the
provisions of the proposed rule as the final rule.
Analysis
Part 1650 was published in final form in the Federal Register on
September 18, 1997 (62 FR 49112), and was subsequently amended by a
final rule published in the Federal Register on June 9, 1999 (64 FR
31052). This proposed rule further amends the final rule.
The Board is amending Sec. 1650.42(b) to provide that a financial
hardship withdrawal may no longer be transferred to an IRA or other
eligible retirement plan. The Board is eliminating this option to
transfer because transfer is available only for distributions which
meet the Internal Revenue Service (IRS) requirements for an eligible
rollover distribution. However, the IRS no longer considers a financial
hardship withdrawal to be an eligible rollover distribution. See 26
U.S.C. 402(c)(4). Instead, a financial hardship withdrawal is treated
as a nonperiodic payment.
Section 402(c)(4) applies to plans qualified under section 401(k)
of the I.R.C. (26 U.S.C. 401(k)); this does not include the TSP, which
is a plan qualified under section 7701(j) (26 U.S.C. 7701(j)).
Nevertheless, the Board intends to follow the IRC rule that applies to
private sector plans. (An age-based in-service withdrawal continues to
be eligible for transfer to an IRA or other qualified plan.)
As a consequence of this change, the Board is also eliminating
Sec. 1650.31(b) which allows a participant to elect additional tax
withholding from a financial hardship in-service withdrawal to ensure
that he or she receives an amount adequate to cover the entire
financial hardship, after withholding. However, unlike an eligible
rollover distribution, a participant can avoid withholding (or can
increase withholding) on a nonperiodic distribution by submitting an
IRS Form W-4P, Withholding Certificate for Pension or Annuity Payments.
Since the participant can obtain the full amount of the withdrawal by
submitting this form to the TSP record keeper, the option to increase
the amount of the withdrawal is no longer necessary.
Other amendments to Sec. 1650.31 include changes to (b)(2) to
clarify that the documentation supporting a financial hardship
withdrawal request based upon an extraordinary expense must be dated
within 45 days of the request. Section 1650.31 also includes a new
paragraph (d). The new paragraph explains that a participant who has a
pending Chapter 13 bankruptcy action is not eligible for a financial
hardship withdrawal because the TSP presumes that the bankruptcy court
is providing adequate funds for the participant's living expenses.
Regulatory Flexibility Act
I certify that these regulations will not have a significant
economic impact on a substantial number of small entities. They will
affect only employees of the Federal Government.
Paperwork Reduction Act
I certify that these regulations do not require additional
reporting under the criteria of the Paperwork Reduction Act of 1980.
Unfunded Mandates Reform Act of 1995
Pursuant to the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 602,
632, 653, and 1501-1571, the effects of this regulation on state,
local, and tribal governments and the private sector have been
assessed. This regulation will not compel the expenditure in any one
year of $100 million or more by state, local, and tribal governments,
in the aggregate, or by the private sector. Therefore, a statement
under section 1532 is not required.
Submission to Congress and the General Accounting Office
Pursuant to 5 U.S.C. 801(a)(1)(A), the Board submitted a report
containing this rule and other required information to
[[Page 43462]]
the U.S. Senate, the U.S. House of Representatives, and the Comptroller
General of the United States prior to publication of this rule in
today's Federal Register. This rule is not a major rule as defined at 5
U.S.C. 804(2).
List of Subjects in 5 CFR Part 1650
Alimony, Claims, Employment benefit plans, Government employees,
Pensions, Retirement.
Roger W. Mehle,
Executive Director, Federal Retirement Thrift Investment Board.
For the reasons set out in the preamble, 5 CFR Chapter VI is
revised as set forth below:
PART 1650--METHODS OF WITHDRAWING FUNDS FROM THE THRIFT SAVINGS
PLAN
1. The authority citation for part 1650 continues to read as
follows:
Authority: 5 U.S.C. 8351, 8433, 8434, 8435, 8474(b)(5), and
8474(c)(1).
2. Section 1650.31 is revised to read as follows:
Sec. 1650.31 Financial hardship withdrawals.
(a) A participant who has not separated from Government employment
and who can demonstrate financial hardship is eligible to withdraw all
or a portion of his or her own contributions to the TSP (and their
attributable earnings) in a single payment to meet certain specified
financial obligations. The amount of a financial hardship withdrawal
must be at least $1,000.
(b) A participant will demonstrate financial hardship if he or she
meets one or both of the following tests:
(1) Based on TSP calculations, the participant's monthly cash flow
is negative (i.e., net income is less than ordinary monthly household
expenses).
(2) The participant has incurred, or will incur within the next six
months, extraordinary expenses which the participant has not paid, for
which he or she has not been and will not be reimbursed, and which
cannot be met by his or her monthly cash flow over a period of six
months. Documentation of the expenses must be dated within 45 days of
the date of the withdrawal request. Extraordinary expenses are limited
to the following four types:
(i) Medical expenses payable by the participant and related to the
treatment of the participant, the participant's spouse, or the
participant's dependents. Generally, eligible expenses are those that
would be eligible for deduction as medical expenses for Federal income
tax purposes, but without regard to the Internal Revenue Service's
(IRS) income limitations on deductibility. However, the following
expenses that are allowed by the IRS are not eligible TSP medical
expenses: health insurance premiums and expenses associated with
household improvements required as a result of a medical condition,
illness, or injury to the participant, the participant's spouse, or the
participant's dependents. These items are already taken into account
elsewhere in the TSP financial hardship calculations.
(ii) The cost of household improvements required as a result of a
medical condition, illness or injury to the participant, the
participant's spouse, or the participant's dependents which is eligible
for deduction as a medical expense for Federal income tax purposes, but
without regard to the IRS income limitations on deductibility or the
fair market value of the property. Household improvements are
structural improvements to the participant's living quarters or the
installation of special equipment that is necessary to accommodate the
circumstances of the incapacitated person.
(iii) The cost of repair or replacement resulting from a personal
casualty loss that would be eligible for deduction for Federal income
tax purposes, but without regard to the IRS income limitations on
deductibility, fair market value of the property, or number of events.
Personal casualty loss includes damage, destruction, or loss of
property resulting from a sudden, unexpected, or unusual event, such as
an earthquake, hurricane, tornado, flood, storm, fire, or theft.
(iv) Legal expenses for attorney fees and court costs associated
with separation or divorce. Court-ordered payments to a spouse or
former spouse and child support payments are not allowed, nor are costs
of obtaining prepaid legal services or other coverage for legal
services.
(c) The amount of a participant's financial hardship withdrawal
cannot exceed the smallest of the following:
(1) The amount requested;
(2) The amount in the participant's account that is equal to his or
her own contributions and attributable earnings; or
(3) (i) The amount which would both:
(A) Make up the participant's negative cash flow, if any, for a
period of six months; and
(B) Pay documented extraordinary expenses, if any.
(ii) If the TSP calculates that the participant has a negative cash
flow and extraordinary expenses, the amount of the disbursement is
equal to six times the amount of the negative monthly cash flow plus
the amount of the extraordinary expenses. If the TSP calculates that
the participant has a positive cash flow, the amount of the
disbursement is equal to the amount of the documented extraordinary
expenses minus six times the amount of the positive monthly cash flow.
(d) A participant is not eligible for an in-service hardship
withdrawal during the time he or she has pending a petition in
bankruptcy under Chapter 13 of the Bankruptcy Code.
3. Section 1650.42 is revised to read as follows:
Sec. 1650.42 Taxes related to in-service withdrawals.
(a) When an in-service withdrawal is paid directly to a participant
from the TSP, the money is taxable income in the year in which the
payment is made. However, a participant does not pay taxes on money
that the TSP transfers directly to an IRA or other eligible retirement
plan until the money is withdrawn from the IRA or plan.
(b) A financial hardship in-service withdrawal from the TSP is not
an eligible rollover distribution, and a participant therefore may not
request the TSP to transfer a financial hardship in-service withdrawal
to an IRA or other eligible retirement plan. A financial hardship in-
service withdrawal is subject to 10% withholding. The withholding is
not mandatory; the participant may either avoid the withholding or
increase the amount of withholding by submitting an IRS Form W-4P,
Withholding Certificate for Pension or Annuity Payments, to the TSP
record keeper.
(c) An age-based in-service withdrawal from the TSP is an eligible
rollover distribution, and a participant may request the TSP to
transfer all or a portion of an age-based in-service withdrawal to an
IRA or other eligible retirement plan, consistent with paragraph (d) of
this section. If the withdrawal is not transferred, it is subject to
mandatory 20% withholding. (The participant may increase the amount of
withholding by submitting an IRS Form W-4P to the TSP record keeper.)
(d) A transfer or rollover may be requested by filing with the TSP
record keeper a TSP Form 75-T. An eligible retirement plan is a plan
defined in the Internal Revenue Code, 26 U.S.C. 402(c)(8). There are
four types of eligible retirement plans: an individual retirement
account (IRA), an individual retirement annuity (other than an
endowment contract), a qualified pension, profit-sharing, or stock
bonus plan, and an annuity plan described in
[[Page 43463]]
26 U.S.C. 403(a). An eligible retirement plan must be maintained in the
United States, which means one of the 50 states or the District of
Columbia.
[FR Doc. 01-20862 Filed 8-17-01; 8:45 am]
BILLING CODE 6760-01-P