Roth Feature to the Thrift Savings Plan and Miscellaneous Uniformed Services Account Amendments, 6504-6517 [2012-2489]

Agencies

• Federal Retirement Thrift Investment Board

[Federal Register Volume 77, Number 26 (Wednesday, February 8, 2012)]
[Proposed Rules]
[Pages 6504-6517]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2489]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

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.

========================================================================


Federal Register / Vol. 77, No. 26 / Wednesday, February 8, 2012 / 
Proposed Rules

[[Page 6504]]



FEDERAL RETIREMENT THRIFT INVESTMENT BOARD

5 CFR Parts 1600, 1601, 1604, 1605, 1650, 1651, 1653, 1655, and 
1690


Roth Feature to the Thrift Savings Plan and Miscellaneous 
Uniformed Services Account Amendments

AGENCY: Federal Retirement Thrift Investment Board.

ACTION: Proposed rule with request for comments.

-----------------------------------------------------------------------

SUMMARY: The Federal Retirement Thrift Investment Board (Agency) 
proposes to amend its regulations to add a Roth feature to the Thrift 
Savings Plan. The Agency also proposes to reorganize regulatory 
provisions pertaining to uniformed services accounts.

DATES: Comments must be received on or before April 9, 2012.

ADDRESSES: You may submit comments using one of the following methods:
     Mail: Office of General Counsel, Attn: Thomas Emswiler, 
Federal Retirement Thrift Investment Board, 1250 H Street NW., 
Washington, DC 20005.
     Hand Delivery/Courier: The address for sending comments by 
hand delivery or courier is the same as that for submitting comments by 
mail.
     Facsimile: Comments may be submitted by facsimile at (202) 
942-1676.
    The most helpful comments explain the reason for any recommended 
change and include data, information, and the authority that supports 
the recommended change.

FOR FURTHER INFORMATION CONTACT: Laurissa Stokes at (202) 942-1645.

SUPPLEMENTARY INFORMATION: The Federal Retirement Thrift Investment 
Board (Agency) administers the Thrift Savings Plan (TSP), which was 
established by the Federal Employees' Retirement System Act of 1986 
(FERSA), Public Law 99-335, 100 Stat. 514. The TSP provisions of FERSA 
are codified, as amended, largely at 5 U.S.C. 8351 and 8401-79. The TSP 
is a defined-contribution retirement savings plan for Federal civilian 
employees and members of the uniformed services. The TSP is similar to 
a private-sector ``401(k) plan'', i.e., a cash or deferred arrangement 
described in section 401(k) of the Internal Revenue Code (26 U.S.C. 
401(k)).
    The assets of the TSP are held in trust in the Thrift Savings Fund. 
Contributions to, or distributions from, the Thrift Savings Fund are 
treated under the Internal Revenue Code in the same manner as 
contributions to, or distributions from, a qualified trust described in 
section 401(a) of the Internal Revenue Code. See 5 U.S.C. 8440; 26 
U.S.C. 7701(j).
    The Thrift Savings Plan Enhancement Act of 2009, Public Law 111-31, 
Division B, Title I, authorized the Agency to implement a qualified 
Roth contribution program described in section 402A of the Internal 
Revenue Code. This feature will allow participants to make TSP 
contributions on an after-tax basis and receive tax-free earnings upon 
distribution if (1) five years have passed since January 1 of the year 
in which they made their first Roth contribution, and (2) a qualifying 
event has occurred (i.e., attainment of age 59\1/2\, permanent 
disability, or death). The TSP Roth feature is similar to a designated 
Roth account maintained by a 401(k) plan.

Scope

    This document sets forth the rules and procedures by which the 
Agency proposes to administer the Roth feature. This document does not, 
however, address in great detail the tax treatment of a contribution 
to, or distribution from, a Roth TSP balance. The tax treatment of a 
contribution to, or distribution from, a Roth TSP balance is governed 
by section 402A of the Internal Revenue Code.

Types of TSP Accounts and Balances

    The TSP offers the following four types of accounts: Civilian 
accounts, uniformed services accounts, civilian beneficiary participant 
accounts, and uniformed services beneficiary participant accounts. A 
participant's Roth contributions and associated earnings may be one 
balance among several balances maintained in one or more of these four 
types of accounts. The Agency has adopted new terminology by which to 
refer to each of these balances.
    Within each of these four types of accounts, the Agency may 
maintain a ``Roth balance.'' A Roth balance consists of (1) Roth 
contributions and associated earnings and (2) Roth money transferred 
into the TSP and associated earnings. No other contributions (e.g. 
matching or Agency Automatic (1%) Contributions) will be allocated to 
the participant's Roth balance. The Agency will separately account for 
all Roth balance contributions, gains, and losses in order to determine 
the taxable and nontaxable portions of a distribution from a 
participant's account.
    Within each of these four types of accounts, the Agency may also 
maintain a ``traditional balance.'' A traditional balance consists of 
(1) tax-deferred employee contributions and associated earnings; (2) 
tax-deferred amounts rolled over or transferred into the TSP and 
associated earnings; (3) tax-exempt contributions and associated 
earnings; (4) matching contributions and associated earnings; and (5) 
Agency Automatic (1%) Contributions and associated earnings.
    Within a traditional balance, the Agency may maintain a ``tax-
deferred balance'' and a ``tax-exempt balance.'' A tax-deferred balance 
consists of all amounts in a participant's traditional balance that 
would otherwise be includible in gross income if paid directly to the 
participant. A tax-exempt balance consists only of tax-exempt 
contributions made to a participant's traditional balance. Earnings on 
tax-exempt contributions will be included in the participant's tax-
deferred balance. Because a tax-exempt balance includes only tax-exempt 
contributions, the terms ``tax-exempt balance'' and ``tax-exempt 
contributions'' are interchangeable.
    Tax-exempt contributions are employee contributions made to a 
uniformed services participant's traditional balance from pay which is 
exempt from taxation under 26 U.S.C. 112 because it was earned in a 
combat zone. Consequently, only a traditional balance that is in a 
uniformed services account or a uniformed services beneficiary 
participant account may contain tax-exempt contributions.
    The term ``tax-exempt contributions'' does not include 
contributions made to the participant's Roth balance from pay

[[Page 6505]]

which is exempt from taxation under 26 U.S.C. 112. Whether a Roth 
contribution is made from taxable pay or tax-exempt pay, the Agency 
will maintain all Roth contributions in a participant's Roth balance.
    Upon adoption of this proposed regulation, any reference in the 
Agency's regulations to a participant's ``account balance'' will mean 
the aggregate of the participant's traditional balance and the 
participant's Roth balance.

Employee Contribution Elections

    Section 1600.11 currently permits the following types of 
contribution elections: (1) To make employee contributions; (2) to 
change the amount of employee contributions; and (3) to terminate 
employee contributions. The Agency proposes to amend Sec.  1600.11 to 
add an election to change the type of employee contributions.
    The Agency also proposes to add a new section, 1600.20, to describe 
the types of employee contributions that a participant may make. 
Section 1600.20 permits employees to make traditional contributions, 
Roth contributions, or a combination of both. Paragraph (c) of Sec.  
1600.20 ensures that a uniformed services participant's tax-exempt pay 
will be contributed to his or her traditional or Roth balance (or a 
combination of both) in accordance with the contribution election made 
under Sec.  1600.11.
    Section 1690.1 contains definitions generally applicable to the 
TSP. The Agency proposes to add definitions for the terms ``employee 
contributions,'' ``traditional contributions,'' and ``Roth 
contributions.'' Employee contributions are traditional contributions 
and Roth contributions made at the participant's election pursuant to 
Sec.  1600.12 and deducted from compensation paid to the 
participant.\1\
---------------------------------------------------------------------------

    \1\ The term ``employee contributions'' as defined in Sec.  
1690.1 is not synonymous with the term ``employee contributions'' as 
defined in 26 CFR 1.401(m)-1(a)(3).
---------------------------------------------------------------------------

    Traditional contributions are tax-deferred employee contributions 
and tax-exempt employee contributions made to the participant's 
traditional balance. Roth contributions are employee contributions made 
to the participant's Roth balance. A participant's employing agency 
will deduct Roth contributions from taxable pay on an after-tax basis 
or from pay exempt from taxation under 26 U.S.C. 112.

Maximum Employee Contributions

    Section 1600.22 currently provides that contributions, other than 
catch-up contributions, made at the participant's election are subject 
to the elective deferral limit contained in section 402(g) of the 
Internal Revenue Code. Like tax-deferred employee contributions, Roth 
contributions are subject to the Internal Revenue Code's elective 
deferral limit. See 26 U.S.C. 402A(c)(2); 26 CFR 1.402(g)-1(b)(5).
    The Agency proposes to revise Sec.  1600.22 to provide that tax-
deferred contributions and Roth contributions, but not tax-exempt 
contributions to a participant's traditional balance, are subject to 
the Internal Revenue Code's elective deferral limit. Elective deferrals 
are, by definition, tax-deferred contributions unless they are Roth 
contributions. See 26 CFR 1.402(g)-1(a). Tax-exempt contributions to a 
participant's traditional balance are neither tax-deferred 
contributions nor Roth contributions. These tax-exempt contributions 
are treated as basis for tax purposes and the Agency does not track 
them against the maximum elective deferral limit set forth in 26 U.S.C. 
402(g).
    A participant may make traditional contributions and Roth 
contributions during the same year, but the combined total of tax-
deferred employee contributions and Roth contributions cannot exceed 
the Internal Revenue Code's elective deferral limit. Likewise, a 
participant may make employee contributions to both a civilian account 
and a uniformed services account during the same year, but the combined 
total of tax-deferred employee contributions and Roth contributions to 
both accounts cannot exceed the Internal Revenue Code's elective 
deferral limit.
    The Agency also proposes to delete all references to the percentage 
limitation on contributions that existed prior to 2006. Those 
references are obsolete. The Consolidated Appropriations Act for Fiscal 
Year 2001, Public Law 106-554, changed the limits on FERS and CSRS TSP 
employee contributions by raising the percentage limitation by one 
percent each year until 2006, when the limits were removed altogether. 
The maximum TSP employee contribution is now limited only by the 
provisions of the Internal Revenue Code.

Catch-up Contributions

    The Agency proposes to move the catch-up contribution rules from 
paragraph (b) of Sec.  1600.22 to a new section numbered 1600.23.
    FERSA provides that an eligible participant (as defined by section 
414(v) of the Internal Revenue Code) may make catch-up contributions to 
the Thrift Savings Fund to the extent permitted by section 414(v) and 
Agency regulations. 5 U.S.C. 8432(a)(3). The Internal Revenue Code 
permits eligible participants to make Roth catch-up contributions. The 
Agency therefore proposes to allow eligible participants to designate 
catch-up contributions as Roth catch-up contributions.
    Under section 414(v) of the Internal Revenue Code, catch-up 
contributions must be elective deferrals. For reasons explained above, 
the Agency does not treat tax-exempt contributions to a traditional 
balance as elective deferrals. Therefore, members of the uniformed 
services are not permitted to make catch-up contributions to a 
traditional balance from tax-exempt pay. However, members of the 
uniformed services may make catch-up contributions to a Roth balance 
from tax-exempt pay. All catch-up contributions are subject to the 
limit described in section 414(v) of the Internal Revenue Code.
    A participant may make traditional catch-up contributions and Roth 
catch-up contributions during the same year, but the combined total 
amount of catch-up contributions of both types cannot exceed the 
Internal Revenue Code's catch-up contribution limit. Likewise, a 
participant who has both a civilian account and a uniformed services 
account may make catch-up contributions to both accounts during the 
same year, but the combined total amount of catch-up contributions to 
both accounts cannot exceed the Internal Revenue Code's catch-up 
contribution limit.

Employing Agency Contributions

    The Agency proposes to add a new section, 1600.19, to address rules 
and procedures related to employing agency contributions. Section 
1600.19 provides that a participant's eligibility to receive matching 
contributions is the same whether the participant chooses to make 
traditional contributions, Roth contributions, or a combination of 
both. Section 1600.19 also provides that the Agency will allocate all 
employing agency contributions to the tax-deferred balance within a 
participant's traditional balance.
    For example, suppose a FERS participant elects to contribute 1% of 
his or her basic pay as a traditional contribution and 2% of his or her 
basic pay as a Roth contribution. The employing agency must contribute 
3% of that employee's basic pay to the employee's tax-deferred balance 
as a matching contribution. Because the employee is a FERS participant, 
the employing agency must also contribute Agency Automatic (1%) 
Contributions to the employee's tax-deferred balance

[[Page 6506]]

whether or not he or she continues to make employee contributions.

Transfers and Rollovers Into the TSP

    The Agency proposes to amend Sec.  1690.1 to add a definition for 
the term ``trustee-to-trustee transfer'' (or ``transfer''). A trustee-
to-trustee transfer is a payment of an eligible rollover distribution 
directly from one eligible employer plan, traditional IRA, or Roth IRA 
to another eligible employer plan, traditional IRA, or Roth IRA at the 
participant's request.\2\
---------------------------------------------------------------------------

    \2\ The term ``trustee-to-trustee transfer,'' as it is used in 
the Agency's regulations, is synonymous with the term ``direct 
rollover'' as that term is used in 26 CFR 1.401(a)(31)-1.
---------------------------------------------------------------------------

    Section 1600.32 provides two methods for transferring an eligible 
rollover distribution into the TSP: (1) Trustee-to-trustee transfer 
(i.e., direct rollover), and (2) rollover by the participant within 60 
days of receipt. The Agency proposes to revise Sec.  1600.32 by 
redesignating it as Sec.  1600.31 and by providing the conditions under 
which the Agency will accept a transfer consisting of Roth money.
    Specifically, the Agency must receive (1) a statement from the plan 
administrator indicating the first year of the participant's 5 year 
Roth non-exclusion period (as defined by 26 U.S.C. 402A(d)(2)(B)) under 
the distributing plan, and (2) either the portion of the transfer 
amount that represents Roth contributions (i.e., tax basis) or a 
statement that the entire amount of the transfer is a qualified Roth 
distribution (as defined by 26 U.S.C. 402A(d)(2)(A)). This requirement 
is necessary to enable the TSP to determine whether the earnings 
portion of any subsequent distribution from the participant's Roth 
balance may be received tax-free.
    The Agency also proposes to revise Sec.  1600.32 to provide that 
the TSP will not accept Roth money that is rolled over by a participant 
after the participant has received the distribution. A rollover by the 
participant in lieu of a transfer would result in several disadvantages 
to the participant. First, when a participant does a rollover after he 
or she receives a distribution of Roth money in lieu of doing a 
transfer, the first taxable year in which the participant made a Roth 
contribution to the distributing plan does not carry over to the TSP 
for purposes of determining whether the earnings portion of a 
subsequent distribution from the participant's Roth balance may be 
received tax-free. See 26 CFR 1.402A-1, Q&A-5(c). Second, the Internal 
Revenue Service prohibits participants from rolling over any nontaxable 
portion of a distribution from a designated Roth account (i.e., a Roth 
401(k), Roth 403(b), or Roth 457(b) account) after the participant has 
received the distribution. See 26 CFR 1.402A-1, Q&A-5(a). For these 
reasons, the TSP will accept Roth money only if the TSP receives the 
money via trustee-to-trustee transfer (i.e., direct rollover).
    FERSA provides that the maximum amount permitted to be transferred 
to the Thrift Savings Fund shall not exceed the amount which would 
otherwise have been included in the participant's gross income for 
Federal income tax purposes. See 5 U.S.C. 8432(j)(2). In accordance 
with FERSA, Sec.  1600.31 prohibits the transfer of after-tax or tax-
exempt money into the TSP. The Agency proposes to redesignate Sec.  
1600.31 as Sec.  1600.30 and revise paragraph (c)(1)(vi) of 
redesignated Sec.  1600.30 to clarify that FERSA's prohibition against 
transferring after-tax money or tax-exempt money into the TSP does not 
apply to Roth money. Although FERSA's prohibition against transferring 
after-tax money or tax-exempt money into the TSP does not apply to Roth 
money, the Internal Revenue Code prohibits the transfer of Roth money 
from a Roth IRA to the TSP Roth balance. Therefore, the TSP will only 
accept Roth money if it is transferred from a designated Roth account 
(i.e., a Roth 401(k) account, Roth 403(b) account, or Roth 457(b) 
account).
    In summary, the Agency will not accept a rollover of Roth money 
distributed from any plan or IRA after the participant has received the 
money. The Agency cannot accept Roth money that is transferred from a 
Roth IRA. The Agency will, however, accept Roth money that is 
transferred from a designated Roth account (i.e., a Roth 401(k) 
account, Roth 403(b) account, or Roth 457(b) account).

Automatic Enrollment Program

    Section 1600.34 currently provides that all newly hired Federal 
employees eligible to participate in the TSP (and Federal employees 
rehired after a separation in service of 31 or more calendar days and 
eligible to participate in the TSP) will automatically have 3% of their 
basic pay contributed to the TSP. These default employee contributions 
will be made unless the employee elects not to contribute or to 
contribute at some other level before the end of the employee's first 
pay period. The introduction of Roth contributions makes it necessary 
to establish whether default employee contributions are traditional 
contributions or Roth contributions. Accordingly, the Agency proposes 
to amend Sec.  1600.34 to provide that all default employee 
contributions shall be contributed to the employee's traditional 
balance.
    Section 1600.34 also currently provides that an employee can opt 
out of automatic enrollment and/or terminate default employee 
contributions by submitting a contribution election. Under the proposed 
revision to Sec.  1600.11, a contribution election includes an election 
to change, add, or terminate any type of contribution. For consistency, 
the Agency also proposes to amend Sec.  1600.34 to provide that an 
employee can opt out of automatic enrollment and/or terminate default 
employee contributions by submitting an election to make Roth 
contributions. A participant can opt out of automatic enrollment or 
terminate default employee contributions by submitting an election to 
make Roth contributions even if the election does not result in a 
change to the employee's total contribution percentage or amount (e.g., 
a participant elects to contribute 3% of his or her basic pay as Roth 
contributions and thus terminates all traditional contributions).

Uniformed Services Accounts

    The Agency proposes to eliminate Part 1604 of the Agency's 
regulations. Part 1604 currently contains rules that are uniquely 
applicable to uniformed services accounts. However, Part 1604 also 
contains some redundant rules and some rules not uniquely applicable to 
uniformed services accounts. In addition, the Agency's regulations have 
evolved such that other parts also contain rules that are uniquely 
applicable to uniformed services accounts. For this reason, the Agency 
proposes to eliminate Part 1604 by deleting redundant provisions and 
relocating the remaining provisions as follows:

------------------------------------------------------------------------
    Deleted part 1604 provision (5 CFR)      Redundant provision (5 CFR)
------------------------------------------------------------------------
1604.5(a)(2)..............................  1655.6(c)
1604.6(a).................................  1605.11
1604.7(b).................................  Part 1650, Subpart G
1604.9(a).................................  1653.2(a)(1)(iii)
1604.10(a)(2).............................  1655.4
1604.10(a)(3).............................  1655.6(c)
1604.10(b)................................  1655.13(a)(3)
1604.10(c)................................  1655.16(b)
------------------------------------------------------------------------


[[Page 6507]]


------------------------------------------------------------------------
   Relocated part 1604 provision (5 CFR)        New location (5 CFR)
------------------------------------------------------------------------
1604.2....................................  1690.1
1604.3....................................  1600.12(e)
1604.4(a)(first two sentences)............  1600.12(e)
1604.4(b).................................  1600.19(b)
1604.5(a)(first two sentences)............  1600.18
1604.5(a)(1)..............................  1600.22(c)
1604.5(b).................................  1600.33
1604.6(b).................................  1605.11(d)
1604.7(a).................................  1650.2(g)
1604.7(c).................................  1650.2(h)
1604.8....................................  1651.14(a)
1604.9(b).................................  1653.5(d)
1604.9(c).................................  1653.5(m)
1604.9(d).................................  1653.5(n)
1604.10(a)(1).............................  1655.10(d)
------------------------------------------------------------------------

Error Correction

    In Sec.  1605.1, the Agency proposes to add definitions for the 
terms ``recharacterization'' and ``redesignation.'' Recharacterization 
is the process of changing a contribution erroneously submitted by an 
employing agency as a tax-deferred contribution to a tax-exempt 
contribution or vice versa. Redesignation is the process of changing a 
contribution erroneously submitted by an employing agency as a 
traditional contribution to a Roth contribution or vice versa. The 
Agency also proposes to set forth the rules and procedures for 
redesignation and recharacterization in a new section numbered 1605.17.
    The term ``recharacterization'' is not synonymous with that term as 
it is used in regulations or guidance published by the Internal Revenue 
Service.\3\ The Agency uses ``recharacterization'' and 
``redesignation'' to refer methods of error correction only. That is, a 
TSP contribution cannot be recharacterized or redesignated at the 
participant's request. Once a contribution has been made to the 
participant's account, it cannot be recharacterized or redesignated 
unless the employing agency erred in its submission. Therefore, a 
participant cannot elect to retroactively change the tax 
characteristics of contributions that have already been made. See 26 
CFR 1.401(k)-1(f)(i).
---------------------------------------------------------------------------

    \3\ Under regulations published by the Internal Revenue Service, 
an IRA owner may choose to ``recharacterize'' certain contributions 
(i.e., treat a contribution made to one type of IRA as made to a 
different type of IRA) for a taxable year. 26 CFR 1.408A-5.
---------------------------------------------------------------------------

    The Agency also proposes to revise Sec.  1605.12 to provide that 
positive earnings on an erroneous contribution to a participant's Roth 
balance will be moved to the participant's traditional balance when the 
error is corrected. If the Agency were to permit earnings attributable 
to an erroneous contribution to remain in the Roth balance when the 
contribution should have been to the participant's traditional balance, 
the Agency would arguably permit a transfer of value from the 
participant's traditional balance to the participant's Roth balance. 
The Internal Revenue Service prohibits any transaction or accounting 
method involving a participant's Roth balance and any other balance 
that has the effect of directly or indirectly transferring value from 
the other balance into the Roth balance. See 26 CFR 1.402A-1, Q&A-13.
    In Sec.  1605.11, the Agency proposes to amend paragraph (c)(1) to 
provide that the schedule of makeup contributions elected by the 
participant must establish the type of contribution (i.e., traditional, 
Roth, or both) to be made each pay period over the duration of the 
schedule. The Agency also proposes to add paragraph (c)(12) to provide 
that a participant cannot contribute a makeup contribution with an ``as 
of '' date occurring prior to [Roth implementation date] to his or her 
Roth balance. If the ``as of '' date of a late or makeup Roth 
contribution is earlier than the existing date of a participant's first 
Roth contribution, the Agency will adjust the start date of the 
participant's 5 year non-exclusion period (as defined by 26 U.S.C. 
402A(d)(2)(B) accordingly.

Transfers From the TSP

    The Agency proposes to revise Sec. Sec.  1650.2, 1650.23, 1651.14, 
1653.3, and 1653.5 to add Roth IRAs to the types of retirement savings 
vehicles to which a participant, beneficiary, or alternate payee might 
choose to transfer or roll over a TSP distribution. The Agency also 
proposes to add a new section, 1650.25, to address rules and procedures 
pertaining to transfers from the TSP.
    Proposed Sec.  1650.25 permits a participant to elect to transfer 
an eligible rollover distribution consisting of funds from his or her 
traditional balance to a single eligible employer plan or IRA and funds 
from his or her Roth balance to another eligible employer plan or IRA. 
The Agency will also allow a participant to elect to transfer the 
traditional and Roth portions of a payment to the same plan or IRA but, 
for each type of balance, the election must be made separately and each 
type of balance will be transferred separately. The Agency will not 
transfer portions of a participant's traditional balance to two 
different eligible employer plans and/or IRAs or portions of a 
participant's Roth balance to two different eligible employer plans 
and/or IRAs.
    Paragraph (c) of Sec.  1650.25 requires the TSP to inform the plan 
administrator or trustee of the plan or Roth IRA receiving a 
distribution from a Roth TSP balance of (1) the start date of the 
participant's Roth 5 year non-exclusion period or the date of the 
participant's first Roth contribution, and (2) the portion of the 
distribution that represents Roth contributions. If a participant 
elects not to transfer a distribution from his or her Roth balance, the 
Agency will inform the participant of the amount of the distribution 
that represents Roth contributions.
    Paragraph (e) of Sec.  1650.25 clarifies that a participant may 
transfer a distribution from the TSP to another eligible employer plan 
or to an IRA only to the extent the transfer is permitted by the 
Internal Revenue Code.

Pro Rata Distributions

    The Agency proposes to amend its regulations to provide that all 
distributions (including loans, death benefit distributions, court-
ordered payments, and required minimum distributions) from the TSP will 
be disbursed pro rata from a participant's traditional and Roth 
balance. To allow participants to designate the source of their 
distributions would require significant record keeping system 
modifications that would delay the availability of Roth contributions. 
The Agency intends to revisit this distribution policy three to five 
years after the Roth contribution feature becomes available.
    Internal Revenue Code section 72 precludes the TSP from allocating 
the portion of an account balance that has already been taxed to a 
distribution in a manner that is other than pro rata. Moreover, the 
Agency is required to treat any distribution from a Roth balance as 
consisting proportionately of contributions and proportionately of 
earnings. See 26 CFR 1.402A-1, Q&A-7. The Agency therefore proposes to 
amend its regulations to require any distribution (including loans, 
death benefit distributions, court-ordered payments, and required 
minimum distributions) from a traditional balance to be pro rated 
between the tax-deferred balance and tax-exempt contributions (if any). 
In addition, any distribution (including loans, death benefit 
distributions, court-ordered payments, and required minimum 
distributions) from a Roth balance must be pro rated between 
contributions in the Roth balance and earnings in the Roth balance.

[[Page 6508]]

Annuities

    The Internal Revenue Service prohibits any transaction involving a 
participant's Roth balance and any other balances that would have the 
effect of directly or indirectly transferring value from the other 
balance(s) into the Roth balance. 26 CFR 1.402A-1, Q&A-13. The Internal 
Revenue Service has noted that it may be difficult for a single annuity 
contract to have guarantees that apply to both Roth and non-Roth 
balances without the potential for a prohibited transfer of value 
between the balances. See 72 FR 21107 (third column). Accordingly, the 
Agency proposes to amend Sec.  1650.14 to prohibit the purchase of one 
annuity contract with both the traditional portion and the Roth portion 
of a withdrawal. If a participant who has a Roth balance and a 
traditional balance desires to purchase an annuity, he or she must 
purchase two separate contracts; one with the traditional balance and 
one with the Roth balance.
    Section 1650.14 currently requires a minimum amount of $3,500 to 
purchase an annuity. The Agency proposes to amend Sec.  1650.14 to 
provide that the $3,500 minimum threshold applies to each annuity 
purchased. If a participant who has a Roth balance elects to use 100% 
of a withdrawal to purchase life annuities and both the traditional 
balance and the Roth balance are below $3,500, the TSP will reject the 
participant's withdrawal request. If only one balance is below $3,500, 
then the TSP will pay that balance to the participant in a single 
payment and use the balance that is $3,500 or above to purchase an 
annuity.
    If a participant who has a Roth balance makes a mixed withdrawal 
election and both the traditional balance and the Roth balance are 
below $3,500, the TSP will reject the withdrawal request. If only one 
balance is below $3,500, then the TSP will pro rate that balance among 
the participant's other elected withdrawal options and will use the 
balance that is $3,500 or above to purchase an annuity.
    Section 1650.14 currently allows a participant to select from 
several types of annuities: (1) Single life, (2) joint life of the 
participant and spouse, and (3) joint life of the participant and a 
person with an insurable interest in the participant. The Agency 
proposes to amend Sec.  1650.14 to provide that, if a participant is 
required to purchase two separate annuities, the participant's 
withdrawal election among the types of annuities and any available 
options and features, will apply to both annuities purchased. A 
participant cannot elect more than one type of annuity per account.

Death Benefits

    The Agency proposes to amend Sec.  1651.3 to provide that a 
beneficiary designation form is not valid if it attempts to designate 
beneficiaries for the participant's traditional balance and the 
participant's Roth balance separately. The Agency also proposes to 
amend Sec.  1651.17 to provide that a valid disclaimer cannot specify 
which balance shall be disclaimed.

Court Orders

    A TSP participant's account balance cannot be assigned or alienated 
and is not subject to execution, levy, attachment, garnishment, or 
other legal process except as provided for in 5 U.S.C. 8437(e)(3). 
Section 8437(e)(3) provides that a participant's account balance shall 
be subject to an obligation of the Executive Director to make a payment 
to another person under a domestic relations court order described in 
section 8467.
    A domestic relations court order is enforceable against the TSP 
only if it is a ``qualifying retirement benefits court order'' or 
``qualifying legal process'' as defined by 5 CFR 1653. A retirement 
benefits court order or legal process is qualifying only if it 
satisfies the requirements and conditions set forth in 5 CFR 1653.2 or 
5 CFR 1653.12, respectively. The Agency proposes to amend Sec. Sec.  
1653.2 and 1653.12 to provide that a retirement benefits court order or 
legal process is not qualifying if it purports to designate the TSP 
Fund, source of contributions, or balance (e.g. traditional, Roth, or 
tax-exempt) from which the payment or portions of the payment shall be 
made.

Loans

    The Agency proposes to amend Sec.  1655.9 to provide that the TSP 
will credit loan payments to a participant's traditional and Roth 
balances in the same proportion that the loan was distributed from the 
participant's account. This requirement is necessary to ensure that the 
loan repayment requirements under Internal Revenue Code section 
72(p)(2)(C) (i.e., at least quarterly amortization of principal and 
interest) are satisfied separately with respect to the Roth balance.

Regulatory Flexibility Act

    I certify that this regulation will not have a significant economic 
impact on a substantial number of small entities. This regulation will 
affect Federal employees and members of the uniformed services who 
participate in the Thrift Savings Plan, which is a Federal defined 
contribution retirement savings plan created under the Federal 
Employees' Retirement System Act of 1986 (FERSA), Public Law 99-335, 
100 Stat. 514, and which is administered by the Agency.

Paperwork Reduction Act

    I certify that these regulations do not require additional 
reporting under the criteria of the Paperwork Reduction Act.

Unfunded Mandates Reform Act of 1995

    Pursuant to the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 602, 
632, 653, 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 Sec.  
1532 is not required.

List of Subjects

5 CFR Part 1600

    Government employees, Pensions, Retirement.

5 CFR Part 1601

    Government employees, Pensions, Retirement.

5 CFR Part 1604

    Military personnel, Pensions, Retirement.

5 CFR Part 1605

    Claims, Government employees, Pensions, Retirement.

5 CFR Part 1650

    Alimony, Claims, Government employees, Pensions, Retirement.

5 CFR Part 1651

    Claims, Government employees, Pensions, Retirement.

5 CFR Part 1653

    Alimony, Child support, Claims, Government employees, Pensions, 
Retirement.

5 CFR Part 1655

    Credit, Government employees, Pensions, Retirement.

5 CFR Part 1690

    Government employees, Pensions, Retirement.

Gregory T. Long,
Executive Director,
    Federal Retirement Thrift Investment Board.


[[Page 6509]]


    For the reasons stated in the preamble, the Agency proposes to 
amend 5 CFR chapter VI as follows:

PART 1600--EMPLOYEE CONTRIBUTION ELECTIONS, CONTRIBUTION 
ALLOCATIONS, AND AUTOMATIC ENROLLMENT PROGRAM

    1. Revise the authority citation for part 1600 to read as follows:

    Authority: 5 U.S.C. 8351, 8432(a), 8432(b), 8432(c), 8432(j), 
8432d, 8474(b)(5) and (c)(1).

    2. Amend Sec.  1600.11 by revising paragraphs (a)(2) and (3) and 
adding paragraph (a)(4) to read as follows:


Sec.  1600.11  Types of elections.

    (a) * * *
    (2) To change the amount of employee contributions;
    (3) To change the type of employee contributions (traditional or 
Roth); or
    (4) To terminate employee contributions.
* * * * *
    4. Amend Sec.  1600.12 by adding paragraph (e) to read as follows:


Sec.  1600.12  Contribution elections.

* * * * *
    (e) A uniformed service member may elect to contribute sums to the 
TSP from basic pay and special or incentive pay (including bonuses). 
However, in order to contribute to the TSP from special or incentive 
pay (including bonuses), the uniformed service member must also elect 
to contribute to the TSP from basic pay. A uniformed service member may 
elect to contribute from special pay or incentive pay (including 
bonuses) in anticipation of receiving such pay (that is, he or she does 
not have to be receiving the special or incentive pay (including 
bonuses) when the contribution election is made); those elections will 
take effect when the uniformed service member receives the special or 
incentive pay (including bonuses).


Sec.  1600.13  [Removed]

    5. In Subpart B, remove Sec.  1600.13.


Sec.  1600.14  [Redesignated as Sec.  1600.13]

    6. In Subpart B, redesignate Sec.  1600.14 as Sec.  1600.13.
    7. In Subpart C, add Sec.  1600.18 to read as follows:


Sec.  1600.18  Separate service member and civilian contributions.

    The TSP maintains uniformed services accounts separately from 
civilian accounts. Therefore, a participant who has made contributions 
as a uniformed service member and as a civilian employee will have two 
TSP accounts: a uniformed services account and a civilian account.
    8. In Subpart C, add Sec.  1600.19 to read as follows:


Sec.  1600.19  Employing agency contributions.

    (a) Agency Automatic (1%) Contributions. Each pay period, any 
agency that employs an individual covered by FERS must make a 
contribution to that employee's tax-deferred balance for the benefit of 
the individual equal to 1% of the basic pay paid to such employee for 
service performed during that pay period. The employing agency must 
make Agency Automatic (1%) Contributions without regard to whether the 
employee elects to make employee contributions.
    (b) Agency Matching Contributions. (1) Any agency that employs an 
individual covered by FERS (or any service that employs an individual 
who has an agreement described in 37 U.S.C. 211(d)) must make a 
contribution to the employee's tax-deferred balance for the benefit of 
the employee equal to the sum of:
    (i) The amount of the employee's contribution that does not exceed 
3% of the employee's basic pay for such pay period; and
    (ii) One-half of such portion of the amount of the employee's 
contributions that exceeds 3% but does not exceed 5% of the employee's 
basic pay for such period.
    (2) A uniformed service member who receives matching contributions 
under 37 U.S.C. 211(d) is not entitled to matching contributions for 
contributions deducted from special or incentive pay (including 
bonuses).
    (c) Timing of employing agency contributions. An employee appointed 
or reappointed to a position covered by FERS is immediately eligible to 
receive employing agency contributions.
    9. In Subpart C, add Sec.  1600.20 to read as follows:


Sec.  1600.20  Types of employee contributions.

    (a) Traditional contributions. A participant may make traditional 
contributions.
    (b) Roth contributions. A participant may make Roth contributions 
in addition to or in lieu of traditional contributions.
    (c) Contributions from tax-exempt pay. A uniformed service member 
who receives pay which is exempt from taxation under 26 U.S.C. 112 will 
have contributions deducted from such pay and made to his or her 
traditional or Roth balance in accordance with an election made under 
paragraph (a) or (b) of this section.
    10. Revise Sec.  1600.21 to read as follows:


Sec.  1600.21  Contributions in whole percentages or whole dollar 
amounts.

    (a) Civilian employees may elect to contribute a percentage of 
basic pay or a dollar amount, subject to the limits described in Sec.  
1600.22. The election must be expressed in whole percentages or whole 
dollar amounts. A participant may contribute a percentage for one type 
of contribution and a dollar amount for another type of contribution. 
If a participant elects to contribute a dollar amount to his or her 
traditional balance and a dollar amount to his or her Roth balance, but 
the total dollar amount elected is less than the amount available to be 
deducted from the participant's basic pay, the employing agency will 
deduct traditional contributions first and Roth contributions second.
    (b) Uniformed services members may elect to contribute a percentage 
of basic pay and special or incentive pay (including bonus pay) subject 
to the limits described in Sec.  1600.22. The election must be 
expressed in a whole percentage for each type of contribution.
    11. Revise Sec.  1600.22 to read as follows:


Sec.  1600.22  Maximum employee contributions.

    A participant's employee contributions are subject to the following 
limitations:
    (a) The maximum employee contribution will be limited only by the 
provisions of the Internal Revenue Code (26 U.S.C.).
    (b) A participant may make traditional contributions and Roth 
contributions during the same year, but the combined total amount of 
the participant's tax-deferred employee contributions and Roth 
contributions cannot exceed the applicable Internal Revenue Code 
elective deferral limit for the year.
    (c) A participant who has both a civilian and a uniformed services 
account can make employee contributions to both accounts, but the 
combined total amount of the participant's tax-deferred employee 
contributions and Roth contributions made to both accounts cannot 
exceed the Internal Revenue Code elective deferral limit for the year.
    12. In Subpart C, add Sec.  1600.23 to read as follows:


Sec.  1600.23  Catch-up contributions.

    (a) A participant may make traditional catch-up contributions or 
Roth catch-up contributions from basic pay at any time during the 
calendar year if he or she:

[[Page 6510]]

    (1) Is at least age 50 by the end of the calendar year;
    (2) Is making employee contributions at a rate that will result in 
the participant making the maximum employee contributions permitted 
under Sec.  1600.22; and
    (3) Does not exceed the annual limit on catch-up contributions 
contained in section 414(v) of the Internal Revenue Code.
    (b) An election to make catch-up contributions must be made using a 
Catch-Up Contribution Election form (or an electronic substitute) and 
will be valid only through the end of the calendar year in which the 
election is made. An election to make catch-up contributions will be 
separate from the participant's regular contribution election. The 
election must be expressed in whole dollar amounts.
    (c) A participant may make traditional catch-up contributions and 
Roth catch-up contributions during the same year, but the combined 
total amount of catch-up contributions of both types cannot exceed the 
applicable Internal Revenue Code catch-up contribution limit for the 
year.
    (d) A participant who has both a civilian account and a uniformed 
services account may make catch-up contributions to both accounts, but 
the combined total amount of catch-up contributions to both accounts 
cannot exceed the Internal Revenue Code catch-up contribution limit for 
the year.
    (e) A participant cannot make catch-up contributions to his or her 
traditional balance from pay which is exempt from taxation under 26 
U.S.C. 112.
    (f) A participant may make catch-up contributions to his or her 
Roth balance from pay which is exempt from taxation under 26 U.S.C. 
112.
    (g) A participant cannot make catch-up contributions from special 
or incentive pay (including bonus pay).
    (h) Catch-up contributions are not eligible for matching 
contributions.


Sec.  1600.31  [Redesignated as Sec.  1600.30]

    13. In subpart D, redesignate Sec.  1600.31 as Sec.  1600.30 and 
revise paragraph (a) and add paragraphs (c) and (d) to read as follows:


Sec.  1600.30  Accounts eligible for transfer or rollover to the TSP.

    (a) A participant who has an open TSP account and is entitled to 
receive (or receives) an eligible rollover distribution, within the 
meaning of I.R.C. section 402(c)(4) (26 U.S.C. 402(c)(4)), from an 
eligible employer plan or a rollover contribution, within the meaning 
of I.R.C. section 408(d)(3) (26 U.S.C. 408(d)(3)), from a traditional 
IRA may transfer or roll over that distribution into his or her 
existing TSP account in accordance with Sec.  1600.31.
* * * * *
    (c) Notwithstanding paragraph (b) of this section, the TSP will 
accept Roth funds that are transferred via trustee-to-trustee transfer 
from an eligible employer plan that maintains a qualified Roth 
contribution program described in section 402A of the Internal Revenue 
Code.
    (d) The TSP will accept a transfer or rollover only to the extent 
the transfer or rollover is permitted by the Internal Revenue Code.


Sec.  1600.32  [Redesignated as Sec.  1600.31]

    14. In subpart D, redesignate Sec.  1600.32 as Sec.  1600.31 and 
amend it by revising paragraphs (a), (b) introductory text, and (b)(1), 
the second sentence in paragraph (b)(2), the first sentence in 
paragraph (b)(3), and paragraphs (b)(4) and (c)(1)(vi) to read as 
follows:


Sec.  1600.31  Methods for transferring or rolling over eligible 
rollover distributions to the TSP.

    (a) Trustee-to-trustee transfer. (1) A participant may request that 
the administrator or trustee of an eligible employer plan or 
traditional IRA transfer any or all of his or her account directly to 
the TSP by executing and submitting the appropriate TSP form to the 
administrator or trustee. The administrator or trustee must complete 
the appropriate section of the form and forward the completed form and 
the distribution to the TSP recordkeeper or the Agency must receive 
sufficient evidence from which to reasonably conclude that a 
contribution is a valid rollover contribution (as defined by 26 CFR 
1.401(a)(31)-1, Q&A-14). By way of example, sufficient evidence to 
conclude a contribution is a valid rollover contribution includes a 
copy of the plan's determination letter, a letter or other statement 
from the plan administrator or trustee indicating that it is an 
eligible employer plan or traditional IRA, a check indicating that the 
contribution is a direct rollover, or a tax notice from the plan to the 
participant indicating that the participant could receive a rollover 
from the plan.
    (2) If the distribution is from a Roth account maintained by an 
eligible employer plan, the plan administrator must also provide to the 
TSP a statement indicating the first year of the participant's Roth 5 
year non-exclusion period under the distributing plan and either:
    (i) The portion of the trustee-to-trustee transfer amount that 
represents Roth contributions (i.e. basis); or
    (ii) A statement that the entire amount of the trustee-to-trustee 
transfer is a qualified Roth distribution (as defined by Internal 
Revenue Code section 402A(d)(2)).
    (b) Rollover by participant. A participant who has already received 
a distribution from an eligible employer plan or traditional IRA may 
roll over all or part of the distribution into the TSP. However, the 
TSP will not accept a rollover by the participant of Roth funds 
distributed from an eligible employer plan. A distribution of Roth 
funds from an eligible employer plan may be rolled into the TSP by 
trustee-to-trustee transfer only. The TSP will accept a rollover by the 
participant of tax-deferred amounts if the following requirements and 
conditions are satisfied:
    (1) The participant must complete the appropriate TSP form.
    (2) * * * By way of example, sufficient evidence to conclude a 
contribution is a valid rollover contribution includes a copy of the 
plan's determination letter, a letter or other statement from the plan 
indicating that it is an eligible employer plan or traditional IRA, a 
check indicating that the contribution is a direct rollover, or a tax 
notice from the plan to the participant indicating that the participant 
could receive a rollover from the plan.
    (3) The participant must submit the completed TSP form, together 
with a certified check, cashier's check, cashier's draft, money order, 
treasurer's check from a credit union, or personal check, made out to 
the ``Thrift Savings Plan,'' for the entire amount of the rollover. * * 
*
    (4) The transaction must be completed within 60 days of the 
participant's receipt of the distribution from his or her eligible 
employer plan or traditional IRA. The transaction is not complete until 
the TSP recordkeeper receives the appropriate TSP form, executed by the 
participant and administrator, trustee, or custodian, together with the 
guaranteed funds for the amount to be rolled over.
    (c) * * *
    (1) * * *
    (vi) If not transferred or rolled over, would be includible in 
gross income for the tax year in which the distribution is paid. This 
paragraph shall not apply to Roth funds distributed from an eligible 
employer plan.
* * * * *

[[Page 6511]]

Sec.  1600.33  [Redesignated as Sec.  1600.32]

    15. In subpart D, redesignate Sec.  1600.33 as Sec.  1600.32.


Sec.  1600.32  [Amended]

    16. In newly redesignated Sec.  1600.32, in paragraphs (a) through 
(c), remove the phrase ``Sec. Sec.  1600.31 and 1600.32'' and add in 
its place the phrase ``Sec. Sec.  1600.30 and 1600.31''.
    16. In Subpart D, add new Sec.  1600.33 to read as follows:


Sec.  1600.33  Combining uniformed services accounts and civilian 
accounts.

    Uniformed services TSP account balances and civilian TSP account 
balances may be combined (thus producing one account), subject to the 
following rules:
    (a) An account balance can be combined with another once the TSP is 
informed (by the participant's employing agency) that the participant 
has separated from Government service.
    (b) Tax-exempt contributions may not be transferred from a 
uniformed services TSP account to a civilian TSP account.
    (c) A traditional balance and a Roth balance cannot be combined.
    (d) Funds transferred to the gaining account will be allocated 
among the TSP Funds according to the contribution allocation in effect 
for the account into which the funds are transferred.
    (e) Funds transferred to the gaining account will be treated as 
employee contributions and otherwise invested as described at 5 CFR 
part 1600.
    (f) A uniformed servicemember must obtain the consent of his or her 
spouse before combining a uniformed services TSP account balance with a 
civilian account that is not subject to FERS spousal rights. A request 
for an exception to the spousal consent requirement will be evaluated 
under the rules explained in 5 CFR part 1650.
    (g) Before the accounts can be combined, any outstanding loans from 
the losing account must be closed as described in 5 CFR part 1655.
    17. Revise Sec.  1600.34 to read as follows:


Sec.  1600.34  Automatic enrollment program.

    (a) All newly hired civilian employees who are eligible to 
participate in the Thrift Savings Plan and those civilian employees who 
are rehired after a separation in service of 31 or more calendar days 
and who are eligible to participate in the TSP will automatically have 
3% of their basic pay contributed to the employee's traditional TSP 
balance (default employee contribution) unless they elect by the end of 
the employee's first pay period (subject to the agency's processing 
time frames):
    (1) To not contribute;
    (2) To contribute at some other level; or
    (3) To make Roth contributions in addition to, or in lieu of, 
traditional contributions.
    (b) After being automatically enrolled, a participant may elect, at 
any time, to terminate default employee contributions, change his or 
her contribution percentage or amount, or make Roth contributions in 
addition to, or in lieu of, traditional contributions.
    18. Amend Sec.  1600.37 by revising paragraphs (a) and (b) to read 
as follows:


Sec.  1600.37  Employing agency notice.

* * * * *
    (a) That default employee contributions equal to 3 percent of the 
employee's basic pay will be deducted from the employee's pay and 
contributed to the employee's traditional TSP balance on the employee's 
behalf if the employee does not make an affirmative contribution 
election;
    (b) The employee's right to elect to not have default employee 
contributions made to the TSP on the employee's behalf, to elect to 
have a different percentage or amount of basic pay contributed to the 
TSP, or to make Roth contributions;
* * * * *

PART 1601--PARTICIPANTS' CHOICES OF TSP FUNDS

    19. Revise the authority citation for part 1601 to read as follows:

    Authority: 5 U.S.C. 8351, 8432d, 8438, 8474(b)(5) and (c)(1).

    20. Amend Sec.  1601.13 by revising paragraph (a)(5) and paragraph 
(c) to read as follows:


Sec.  1601.13  Elections.

    (a) * * *
    (5) Once a contribution allocation becomes effective, it remains in 
effect until it is superseded by a subsequent contribution allocation 
or the participant withdraws his or her entire account. If a separated 
participant is rehired and had not withdrawn his or her entire TSP 
account, the participant's last contribution allocation before 
separation from Government service will be effective until a new 
allocation is made. If, however, the participant had withdrawn his or 
her entire TSP account, then the participant's contributions will be 
allocated to the G Fund until a new allocation is made.
* * * * *
    (c) Contribution elections. A participant may designate the amount 
or type of employee contributions he or she wishes to make to the TSP 
or may stop contributions only in accordance with 5 CFR part 1600.

PART 1604--[REMOVED AND RESERVED]

    21. Under the authority of 5 U.S.C. 8474(b)(5), remove and reserve 
part 1604.

PART 1605--CORRECTION OF ADMINISTRATIVE ERRORS

    22. Revise the authority citation for part 1605 to read as follows:

    Authority: 5 U.S.C. 8351, 8432a, 8432d, 8474(b)(5) and (c)(1). 
Subpart B also issued under section 1043(b) of Pub. L. 104-106, 110 
Stat. 186 and Sec.  7202(m)(2) of Pub. L. 101-508, 104 Stat. 1388.

    23. Amend Sec.  1605.1(b) as follows:
    a. Revise the definition of attributable pay date.
    b. Add definitions for recharacterization, recharacterization 
record, redesignation, and redesignation record.
    The revision and additions read as follows:


Sec.  1605.1  Definitions.

* * * * *
    (b) * * *
    Attributable pay date means:
    (1) The pay date of a contribution that is being redesignated from 
traditional to Roth, or vice versa;
    (2) In the case of the uniformed services, the pay date of a 
contribution that is being recharacterized from tax-deferred to tax-
exempt, or vice versa; or
    (3) The pay date of an erroneous contribution for which a negative 
adjustment is being made. However, if the erroneous contribution for 
which a negative adjustment is being made was a makeup or late 
contribution, the attributable pay date is the ``as of'' date of the 
erroneous makeup or late contribution.
* * * * *
    Recharacterization means the process of changing a contribution 
that the employing agency erroneously submitted as a tax-deferred 
contribution to a tax-exempt contribution (or vice versa). 
Recharacterization is a method of error correction only. It applies 
only to the traditional balance of a uniformed services account.
    Recharacterization record means a data record submitted by an 
employing agency to recharacterize a tax-deferred contribution that the 
employing agency erroneously submitted as a tax-exempt contribution (or 
vice versa).

[[Page 6512]]

    Redesignation means the process of moving a contribution (and its 
associated positive earnings) from a participant's traditional balance 
to the participant's Roth balance or vice versa in order to correct an 
employing agency error that caused the contribution to be submitted to 
the wrong balance. Redesignation is a method of error correction only. 
A participant cannot request the redesignation of contributions unless 
the employing agency made an error in the submission of the 
contributions.
    Redesignation record means a data record submitted by an employing 
agency to redesignate a contribution that the employing agency 
erroneously submitted to the wrong balance (traditional or Roth).
    24. Amend Sec.  1605.11 by revising paragraph (c)(1) and the second 
sentence in paragraph (c)(8), by adding paragraphs (c)(12) and (13), 
and by adding paragraph (d) to read as follows:


Sec.  1605.11  Makeup of missed or insufficient contributions.

* * * * *
    (c) * * *
    (1) The schedule of makeup contributions elected by the participant 
must establish the dollar amount of the contributions and the type of 
employee contributions (traditional or Roth) to be made each pay period 
over the duration of the schedule. The contribution amount per pay 
period may vary during the course of the schedule, but the total amount 
to be contributed must be established when the schedule is created. 
After the schedule is created, a participant may, with the agreement of 
his or her agency, elect to change his or her payment amount (e.g., to 
accelerate payment) or elect to change the type of employee 
contributions (traditional or Roth). The length of the schedule may not 
exceed four times the number of pay periods over which the error 
occurred.
* * * * *
    (8) * * * If a participant separates from Government service, the 
participant may elect to accelerate the payment schedule by a lump sum 
contribution from his or her final paycheck.
* * * * *
    (12) A participant is not eligible to contribute makeup 
contributions with an ``as of'' date occurring prior to [Roth 
implementation date] to his or her Roth balance.
    (13) If the ``as of'' date of a Roth contribution that is submitted 
as a makeup contribution is earlier than the participant's existing 
Roth initiation date, the TSP will adjust the participant's Roth 
initiation date.
    (d) Missed bonus contributions. This paragraph (d) applies when an 
employing agency fails to implement a contribution election that was 
properly submitted by a uniformed service member requesting that a TSP 
contribution be deducted from bonus pay. Within 30 days of receiving 
the employing agency's acknowledgment of the error, a uniformed service 
member may establish a schedule of makeup contributions with his or her 
employing agency to replace the missed contribution through future 
payroll deductions. These makeup contributions can be made in addition 
to any TSP contributions that the uniformed service member is otherwise 
entitled to make.
    (1) The schedule of makeup contributions may not exceed four times 
the number of months it would take for the uniformed service member to 
earn basic pay equal to the dollar amount of the missed contribution. 
For example, a uniformed service member who earns $29,000 yearly in 
basic pay and who missed a $2,500 bonus contribution to the TSP can 
establish a schedule of makeup contributions with a maximum duration of 
8 months. This is because it takes the uniformed service member 2 
months to earn $2,500 in basic pay (at $2,416.67 per month).
    (2) At its discretion, an employing agency may set a ceiling on the 
length of a schedule of employee makeup contributions. The ceiling may 
not, however, be less than twice the number of months it would take for 
the uniformed service member to earn basic pay equal to the dollar 
amount of the missed contribution.
    25. Amend Sec.  1605.12 by revising paragraph (d)(1) as follows:


Sec.  1605.12  Removal of erroneous contributions.

* * * * *
    (d) * * *
    (1) If, on the posting date, the amount calculated under paragraph 
(c) of this section is equal to or greater than the amount of the 
proposed negative adjustment, the full amount of the adjustment will be 
removed from the participant's account and returned to the employing 
agency. Earnings on the erroneous contribution will remain in the 
participant's account. However, positive earnings on an erroneous 
contribution to the participant's Roth balance will be moved to the 
participant's traditional balance;
* * * * *
    26. Amend Sec.  1605.14 by revising the first sentence in paragraph 
(b)(4) and the first sentence in paragraph (c)(3) to read as follows:


Sec.  1605.14  Misclassified retirement system coverage.

* * * * *
    (b) * * *
    (4) If the retirement coverage correction is a Federal Employees' 
Retirement Coverage Act (FERCCA) correction, the employing agency must 
submit makeup employee contributions on late payment records. The 
participant is entitled to breakage on contributions from all sources. 
* * *
* * * * *
    (c) * * *
    (3) The TSP will consider a participant to be separated from 
Government service for all TSP purposes and the employing agency must 
submit an employee data record to reflect separation from Government 
service. * * *
* * * * *
    27. Amend Sec.  1605.15 by adding paragraph (d) to read as follows:


Sec.  1605.15  Reporting and processing late contributions and late 
loan payments.

* * * * *
    (d) If the ``as of'' date of a late Roth contribution is earlier 
than the participant's existing Roth initiation date, the TSP will 
adjust the participant's Roth initiation date.
    28. In Subpart B, add Sec.  1605.17 to read as follows:


Sec.  1605.17  Redesignation and recharacterization.

    (a) Applicability. This section applies to the redesignation of 
contributions which, due to employing agency error, were contributed to 
the participant's traditional balance when they should have been 
contributed to the participant's Roth balance or were contributed to 
the participant's Roth balance when they should have been contributed 
to the participant's traditional balance. This section also applies to 
the recharacterization of contributions which, due to employing agency 
error, were contributed as tax-deferred contributions when they should 
have been contributed as tax-exempt contributions (or vice versa). It 
is the responsibility of the employing agency to determine whether it 
has made an error that entitles a participant to error correction under 
this section.
    (b) Method of correction. The employing agency must promptly submit 
a redesignation record or a recharacterization record in accordance 
with this part and the procedures provided to employing agencies by the 
Board in bulletins or other guidance.
    (c) Processing redesignations and recharacterizations. (1) Upon 
receipt of a properly submitted redesignation

[[Page 6513]]

record, the TSP shall treat the erroneously submitted contribution (and 
associated positive earnings) as if the contribution had been made to 
the correct balance on the date that it was contributed to the wrong 
balance. The TSP will adjust the participant's traditional balance and 
the participant's Roth balance accordingly. The TSP will also adjust 
the participant's Roth initiation date as necessary.
    (2) Upon receipt of a properly submitted recharacterization record 
or recharacterization request, the TSP will change the tax 
characterization of the erroneously characterized contribution.
    (3) Agency Automatic (1%