[Federal Register Volume 66, Number 134 (Thursday, July 12, 2001)]
[Proposed Rules]
[Pages 36494-36495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17482]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 66, No. 134 / Thursday, July 12, 2001 / 
Proposed Rules  

[[Page 36494]]



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: Proposed rule.

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SUMMARY: The Executive Director of the Federal Retirement Thrift 
Investment Board (Board) proposes to amend 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 proposed amendment also 
incorporates administrative changes in calculating the amount of a 
financial hardship withdrawal.

DATES: Comments must be received on or before August 13, 2001.

ADDRESSES: Comments may be sent to: Elizabeth S. Woodruff, General 
Counsel, Federal Retirement Thrift Investment Board, 1250 H Street, 
NW., Washington, DC 20005.

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 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 proposes to revise 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 proposes to eliminate 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 proposes 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 also proposes to 
eliminate 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 changes 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. Proposed Sec. 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.

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, the Board proposes to 
amend 5 CFR part 1650 as follows:

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).


[[Page 36495]]


    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 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. 01-17482 Filed 7-11-01; 8:45 am]
BILLING CODE 6760-01-P