The CARES Act passed in late March 2020 to assist Americans struggling under the burden of COVID-19 has provisions for employer-sponsored retirement plans which can be helpful to federal employees struggling with the impact of the virus. Following is a summary of the changes allowed by the Act itself as well as how the TSP is implementing the provisions.
The first provision lifts the 10% penalty that is generally associated with withdrawals taken prior to age 59 ½. The Act states that those who are “adversely impacted” by the virus are granted a waiver of the 10% penalty on withdrawals. Further, withdrawals are allowed up to $100,000 and the amount withdrawn can be repaid to the account from which it was withdrawn within a three-year time period. In addition, any taxes due on the withdrawal (assuming the participant is not planning to repay the withdrawal) would be eligible to be spread out over 3 years (2020, 2021, 2022). For example, if a participant takes a $10,000 withdrawal in 2020 the distribution taxes can be spread out over three tax years (2020, 2021, and 2022). This would reduce the tax impact for the employee as generally, such a withdrawal would be fully taxable in the year of receipt. Further, If the participant repays the full $10,000 in the year 2022 it will be treated as though the entire transaction was a trustee to trustee transfer. The participant will have to file amended tax returns for 2020 and 2021 in order to recoup the taxes paid on the withdrawal in those years.
The second provision, outlined in section 2022 of the CARES Act, allows that the limits on loan amounts from employer-sponsored plans may be increased and loan repayment provisions may be delayed up to 1 year. There is a stipulation, however, that grants employers the freedom to choose whether or not to enact either or both of these provisions in their plans. In addition, employers are given flexibility as to what extent they will implement any provisions they chose. Of note, for any changes the employer elects to make, their plan document will need to be amended. This generally requires additional fees to the employer.
The Thrift Savings Plan (TSP) is the largest employer-sponsored defined contribution plan in the U.S. As of now, the plan is still working on its implementation to put these provisions into practice for employees. It is important that TSP participants be cautious until the TSP provides further guidance as to how they will implement these provisions. We would encourage employees to not make any moves until TSP provides such guidance. A source has indicated TSP plans to issue an update by May 15th. We will keep you posted as soon as we receive any additional information. In the meantime, please contact us with specific questions regarding your situation if needed. We are here to help!
**Written by Jennifer Meyer, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Meyer and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.**