Roth Feature to the Thrift Savings Plan and Miscellaneous Uniformed Services Account Amendments, 26417-26430 [2012-10630]

Download as PDF 26417 Rules and Regulations Federal Register Vol. 77, No. 87 Friday, May 4, 2012 This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. The Code of Federal Regulations is sold by the Superintendent of Documents. Prices of new books are listed in the first FEDERAL REGISTER issue of each week. 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 Federal Retirement Thrift Investment Board. ACTION: Final rule. AGENCY: The Federal Retirement Thrift Investment Board (Agency) is amending its regulations to add a Roth feature to the Thrift Savings Plan. This final rule also reorganizes regulatory provisions pertaining to uniformed services accounts. DATES: This rule is effective May 7, 2012. 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 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 erowe on DSK2VPTVN1PROD with RULES SUMMARY: VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 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 591⁄2 permanent disability, or death). The TSP Roth feature is similar to a designated Roth account maintained by a 401(k) plan. On February 8, 2012, the Agency published a proposed rule with request for comments in the Federal Register (77 FR 6504, February 8, 2012). The Agency received one or more comments from five individuals. One individual commented that requiring distributions to be made pro rata from participants’ Roth and traditional balances is disadvantageous to participants who wish to withdraw a portion of their account balance within five years after having made their first Roth contribution. The Agency is aware that this rule will have tax consequences for participants who wish to withdraw a portion of their account balance within five years after having made their first Roth contribution. The Agency also understands that this rule is unique to the TSP. The Agency adopted this rule to facilitate the availability of Roth contributions as early as possible. To allow participants to designate the source of their distributions would require significant modifications to Optical Character Recognition (OCR) forms and system applications which would delay the availability of Roth contributions. The Agency intends to revisit this rule in three to five years. Two individuals objected to the pro rata distribution of Roth contributions and earnings. The allocation of Roth contributions and earnings to a distribution from a Roth TSP balance is dictated by the Internal Revenue Code. A distribution from a Roth TSP balance is treated differently under the Internal Revenue Code than a distribution from a Roth IRA. Roth IRAs are governed by section 408A of the Internal Revenue Code, whereas the Roth TSP feature is governed by section 402A of the Internal Revenue Code. The ordering rules in section 408A(d)(4),which provide that the first distributions from a Roth IRA are a nontaxable return of contributions until all contributions have been returned, do not apply to distributions from a TSP Roth balance. Instead, the PO 00000 Frm 00001 Fmt 4700 Sfmt 4700 Agency is required treat distributions from a Roth balance as consisting proportionately of contributions and proportionately of earnings. See 26 CFR 1.402A–1, Q&A–3. One individual suggested that Roth TSP balances should not be subject to the required minimum distribution rules provided in section 401(a)(9) of the Internal Revenue Code. Pursuant to guidance issued by the Internal Revenue Service, the Agency must apply the required minimum distribution rules with respect to a participant’s Roth TSP balance in the same manner as any other portion of the participant’s account balance. See 26 CFR 1.401(k)–1(f)(4). Two individuals suggested that the TSP permit in-plan Roth rollovers. The Small Business Jobs Act of 2010, Public Law 111–240, allowed employersponsored plans to offer ‘‘in-plan Roth rollovers.’’ An in-plan Roth rollover in the context of the TSP would be a transfer or rollover of funds from a participant’s traditional balance to the participant’s Roth balance.1 However, the Small Business Jobs Act of 2010 was not effective until September 27, 2010, well after the TSP began its work to implement the Roth feature. In addition, the Internal Revenue Code places significant limitations on in-plan Roth rollovers. For example, the Agency cannot permit a participant to transfer or rollover non-Roth TSP funds to a Roth TSP balance unless that participant is eligible to make an existing withdrawal election. Therefore, a TSP participant who is still employed by the Federal government could elect an in-plan Roth rollover only if he/she has attained age 591⁄2. The Agency does not have the authority to expand its withdrawal elections without seeking an amendment to its governing statute. For these reasons, the Agency has decided to postpone any formal consideration of offering in-plan Roth rollovers until after the TSP Roth contribution feature is fully implemented. Implementation Date The Thrift Savings Plan will begin accepting Roth contributions from Federal agency and uniformed service payroll offices on May 7, 2012. 1 The term ‘‘transfer’’ as it is used in the Agency’s regulations, is synonymous with the term ‘‘direct rollover’’ as that term is used in IRS guidance. The Agency uses the term ‘‘rollover’’ to refer only to a rollover by the participant within 60 days after he/ she receives a distribution. E:\FR\FM\04MYR1.SGM 04MYR1 26418 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations erowe on DSK2VPTVN1PROD with RULES However, not all agencies or services have completed the technical and programmatic modifications of their payroll systems required to implement Roth TSP. These agencies or services will require additional time to modify their payroll systems and will permit their employees to make Roth contributions as soon after May 7, 2012 as they are able. 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 taxexempt 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- VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 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 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. After the effective date of this rule, 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 is amending § 1600.11 to add an election to change the type of employee contributions. This final rule also adds 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 § 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 § 1600.11. Section 1690.1 contains definitions generally applicable to the TSP. This final rule adds 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 § 1600.12 and deducted from compensation paid to the participant.2 2 The term ‘‘employee contributions’’ as defined in § 1690.1 is not synonymous with the term ‘‘employee contributions’’ as defined in 26 CFR 1.401(m)–1(a)(3). PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 Traditional contributions are taxdeferred 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 is revising § 1600.22 to provide that tax-deferred contributions and Roth contributions, but not taxexempt 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 taxdeferred 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. This final rule also removes 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 E:\FR\FM\04MYR1.SGM 04MYR1 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations 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. erowe on DSK2VPTVN1PROD with RULES Catch-Up Contributions This final rule relocates the catch-up contribution rules from paragraph (b) of § 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 will therefore 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 catchup 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 catchup contributions during the same year, but the combined total amount of catchup 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 This final rule adds 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 VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 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 whether or not he or she continues to make employee contributions. Transfers and Rollovers Into the TSP The Agency is amending § 1690.1 to add a definition for the term ‘‘trustee-totrustee 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.3 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 is revising § 1600.32 by redesignating it as § 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 is also revising § 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 3 The term ‘‘trustee-to-trustee transfer’’ (or ‘‘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. PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 26419 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 trusteeto-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, § 1600.31 prohibits the transfer of after-tax or taxexempt money into the TSP. This final rule redesignates § 1600.31 as § 1600.30 and revises paragraph (c)(1)(vi) of redesignated § 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 E:\FR\FM\04MYR1.SGM 04MYR1 26420 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations 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 is amending § 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 newly revised § 1600.11, a contribution election includes an election to change, add, or terminate any type of contribution. For consistency, the Agency is amending § 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). erowe on DSK2VPTVN1PROD with RULES Uniformed Services Accounts This final rule removes 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 is eliminating Part 1604 by deleting redundant provisions and relocating the remaining provisions as follows: Deleted Part 1604 provision (5 CFR) 1604.5(a)(2) .............. 1604.6(a) ................... VerDate Mar<15>2010 Redundant provision (5 CFR) 1655.6(c) 1605.11 15:04 May 03, 2012 Jkt 226001 Deleted Part 1604 provision (5 CFR) Redundant provision (5 CFR) 1604.7(b) ................... 1604.9(a) ................... 1604.10(a)(2) ............ 1604.10(a)(3) ............ 1604.10(b) ................. 1604.10(c) ................. Part 1650, Subpart G 1653.2(a)(1)(iii) 1655.4 1655.6(c) 1655.13(a)(3) 1655.16(b) Relocated Part 1604 provision (5 CFR) New location (5 CFR) 1604.2 ....................... 1604.3 ....................... 1604.4(a)(first two sentences). 1604.4(b) ................... 1604.5(a)(first two sentences). 1604.5(a)(1) .............. 1604.5(b) ................... 1604.6(b) ................... 1604.7(a) ................... 1604.7(c) ................... 1604.8 ....................... 1604.9(b) ................... 1604.9(c) ................... 1604.9(d) ................... 1604.10(a)(1) ............ 1690.1 1600.12(e) 1600.12(e) 1600.19(b) 1600.18 1600.22(c) 1600.33 1605.11(d) 1650.2(g) 1650.2(h) 1651.14(a) 1653.5(d) 1653.5(m) 1653.5(n) 1655.10(d) Error Correction This final rule adds definitions to § 1605.1 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 rule also sets 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.4 The Agency uses ‘‘recharacterization’’ and ‘‘redesignation’’ to refer to 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 4 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. PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 have already been made. See 26 CFR 1.401(k)–1(f)(i). The Agency is revising § 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. The Agency is amending paragraph (c)(1) of § 1605.11 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 is also adding paragraph (c)(12) to 1605.11 in order to provide that a participant cannot contribute a makeup contribution with an ‘‘as of’’ date occurring prior to May 5, 2012 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 nonexclusion period (as defined by 26 U.S.C. 402A(d)(2)(B) accordingly. Transfers From the TSP The Agency is revising §§ 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. This final rule also adds a new section, 1650.25, to address rules and procedures pertaining to transfers from the TSP. Section 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 E:\FR\FM\04MYR1.SGM 04MYR1 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations 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 § 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 § 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. erowe on DSK2VPTVN1PROD with RULES Pro Rata Distributions The Agency is amending its regulations to provide that all withdrawals, loan distributions, death benefit distributions, court-ordered payments, and required minimum distributions will be disbursed pro rata from a participant’s traditional and Roth balance. The Agency is also amending its regulations to require distributions from a traditional balance to be pro rated between the tax-deferred balance and tax-exempt contributions (if any) and to require distributions from a Roth balance to be pro rated between contributions in the Roth balance and earnings in the Roth balance. This requirement is necessary because 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. 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 VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 column). Accordingly, the Agency is amending § 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 is amending § 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 is amending § 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 is amending § 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 is also amending § 1651.17 to provide that a valid disclaimer cannot specify which balance shall be disclaimed. PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 26421 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 part 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 is amending §§ 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 is amending § 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. E:\FR\FM\04MYR1.SGM 04MYR1 26422 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations 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 § 1532 is not required. Submission to Congress and the General Accounting Office Pursuant to 5 U.S.C. 810(a)(1)(A), the Agency submitted a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States before publication of this rule in the Federal Register. This rule is not a major rule as defined at 5 U.S.C. 814(2). List of Subjects 5 CFR Part 1600 Government employees, Pensions, Retirement. 5 CFR Part 1601 Government employees, Pensions, Retirement. Thomas K. Emswiler, Acting Executive Director, Federal Retirement Thrift Investment Board. For the reasons stated in the preamble, the Agency amends 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). 2–3. Amend § 1600.11 by revising paragraphs (a)(2) and (3) and adding paragraph (a)(4) to read as follows: ■ § 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 § 1600.12 by adding paragraph (e) to read as follows: § 1600.12 5 CFR Part 1604 Contribution elections. * 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. * * * * (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). § 1600.13 5 CFR Part 1655 erowe on DSK2VPTVN1PROD with RULES 5 CFR Part 1690 Government employees, Pensions, Retirement. ■ Credit, Government employees, Pensions, Retirement. [Redesignated as § 1600.13] 6. In Subpart B, redesignate § 1600.14 as § 1600.13. ■ 7. In Subpart C, add § 1600.18 to read as follows: ■ VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 PO 00000 Frm 00006 Fmt 4700 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 § 1600.19 to read as follows: § 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 taxdeferred 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 § 1600.20 to read as follows: § 1600.20 Types of employee contributions. [Removed] 5. In Subpart B, remove § 1600.13. § 1600.14 § 1600.18 Separate service member and civilian contributions. Sfmt 4700 (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. E:\FR\FM\04MYR1.SGM 04MYR1 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations (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 § 1600.21 to read as follows: § 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 § 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 more 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 basic pay and special or incentive pay (including bonus pay) subject to the limits described in § 1600.22. The election may be expressed as a whole percentage, a dollar amount, or both as determined by the member’s service. ■ 11. Revise § 1600.22 to read as follows: erowe on DSK2VPTVN1PROD with RULES § 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 taxdeferred 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 VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 the Internal Revenue Code elective deferral limit for the year. ■ 12. In Subpart C, add § 1600.23 to read as follows: § 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: (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 § 1600.22; and (3) Does not exceed the annual limit on catch-up contributions contained in section 414(v) 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 catchup contributions during the same year, but the combined total amount of catchup 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 catchup contribution limit for the year. (e) A participant cannot make catchup 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 catchup contributions from special or incentive pay (including bonus pay). (h) Catch-up contributions are not eligible for matching contributions. § 1600.31 [Redesignated as § 1600.30] 13a. In subpart D, redesignate § 1600.31 as § 1600.30. ■ 13b. In newly redesignated § 1600.30, revise paragraph (a) and add paragraphs (c) and (d) to read as follows: ■ PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 26423 § 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 § 1600.31. * * * * * (c) Notwithstanding paragraph (b) of this section, the TSP will accept Roth funds that are transferred via trustee-totrustee 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. § 1600.32 [Redesignated as § 1600.31] 14a. In subpart D, redesignate § 1600.32 as § 1600.31. ■ 14b. In newly redesignated § 1600.31, revise 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: ■ § 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 record keeper 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 E:\FR\FM\04MYR1.SGM 04MYR1 erowe on DSK2VPTVN1PROD with RULES 26424 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations 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 taxdeferred 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 record keeper 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) * * * VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 (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. * * * * * § 1600.33 [Redesignated as § 1600.32] 15. In subpart D, redesignate § 1600.33 as § 1600.32. ■ § 1600.32 [Amended] 16a. In newly redesignated § 1600.32, in paragraphs (a) through (c), remove the phrase ‘‘§§ 1600.31 and 1600.32’’ and add in its place the phrase ‘‘§§ 1600.30 and 1600.31’’. ■ 16b. In Subpart D, add new § 1600.33 to read as follows: ■ § 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 service member 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 § 1600.34 to read as follows: § 1600.34 Automatic enrollment program. (a) All newly hired civilian employees who are eligible to participate in the Thrift Savings Plan and those civilian PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 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 § 1600.37 by revising paragraphs (a) and (b) to read as follows: § 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 § 1601.13 by revising paragraphs (a)(5) and (c) to read as follows: ■ § 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 E:\FR\FM\04MYR1.SGM 04MYR1 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations 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 Public Law 104– 106, 110 Stat. 186 and § 7202(m)(2) of Public Law 101–508, 104 Stat. 1388. 23. Amend § 1605.1(b) as follows: a. Revise the definition of attributable pay date; ■ b. In the definition of late contributions, redesignate paragraphs (1) through (4) as (i) through (iv), and in newly redesignated paragraph (iii), remove ‘‘(1) and (2)’’ and add ‘‘(i) and (ii)’’ in its place; and ■ c. Add definitions for recharacterization, recharacterization record, redesignation, and redesignation record. The revision and additions read as follows: ■ ■ § 1605.1 Definitions. erowe on DSK2VPTVN1PROD with RULES * * * * * (b) * * * Attributable pay date means: (i) The pay date of a contribution that is being redesignated from traditional to Roth, or vice versa; (ii) In the case of the uniformed services, the pay date of a contribution that is being recharacterized from taxdeferred to tax-exempt, or vice versa; or (iii) 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. * * * * * VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 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). 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 § 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: § 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 PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 26425 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 May 5, 2012 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 § 1605.12 by revising paragraph (d)(1) as follows: § 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 E:\FR\FM\04MYR1.SGM 04MYR1 26426 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations 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 § 1605.14 by revising the first sentence in paragraph (b)(4) and the first sentence in paragraph (c)(3) to read as follows: § 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 § 1605.15 by adding paragraph (d) to read as follows: § 1605.15 Reporting and processing late contributions and late loan payments. PART 1650—METHODS OF WITHDRAWING FUNDS FROM THE THRIFT SAVINGS PLAN * * * * * (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 § 1605.17 to read as follows: 29. Revise the authority citation for part 1650 to read as follows: ■ Authority: 5 U.S.C. 8351, 8432d, 8433, 8434, 8435, 8474(b)(5) and 8474(c)(1). 30. Amend § 1650.2 by revising the section heading and paragraphs (f) and (g) and by adding paragraph (h) to read as follows: ■ erowe on DSK2VPTVN1PROD with RULES § 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 taxdeferred contributions when they VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 should have been contributed as taxexempt 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 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%) Contributions and matching contributions cannot be redesignated as Roth contributions or recharacterized as tax-exempt contributions. (4) There is no breakage associated with redesignation or recharacterization actions. § 1650.2 Eligibility and general rules for a TSP withdrawal. * * * * * (f) A participant can elect to have any portion of a single or monthly payment that is not transferred to an eligible employer plan, traditional IRA, or Roth IRA deposited directly, by electronic funds transfer (EFT), into a savings or checking account at a financial institution in the United States. (g) If a participant has a civilian TSP account and a uniformed services TSP account, the rules in this part apply to each account separately. For example, PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 the participant is eligible to make one age-based in-service withdrawal from each account. A separate withdrawal request must be made for each account. (h) All withdrawals will be distributed pro rata from the participant’s traditional and Roth balances. The distribution from the traditional balance will be further pro rated between the tax-deferred balance and tax-exempt balance. The distribution from the Roth balance will be further pro rated between contributions in the Roth balance and earnings in the Roth balance. In addition, all withdrawals will be distributed pro rata from all TSP Funds in which the participant’s account is invested. All pro rated amounts will be based on the balances in each TSP Fund or source of contributions on the day the withdrawal is processed. ■ 31. Amend § 1650.11 by revising the first sentence in paragraph (c) to read as follows: § 1650.11 Withdrawal elections. * * * * * (c) If a participant’s vested account balance is less than $200 when he or she separates from Government service, the TSP will automatically pay the balance to the participant at his or her TSP address of record.* * * ■ 32. Amend § 1650.14 by: ■ a. Revising paragraph (a); ■ b. Redesignating paragraphs (b) through (d) as paragraphs (f) through (h); ■ c. Redesignating existing paragraphs (e) through (g) as (j) through (l); and ■ d. Adding new paragraphs (b), (c), (d), (e) and (i). The revision and additions read as follows: § 1650.14 Annuities. (a) A participant electing a full postemployment withdrawal can use all or a portion of his or her account balance to purchase a life annuity. (b) If a participant has a traditional balance and a Roth balance, the TSP must purchase two separate annuity contracts for the participant: One from the portion of the withdrawal distributed from his or her traditional balance and one from the portion of the withdrawal distributed from his or her Roth balance. (c) A participant cannot select only one balance (traditional or Roth) from which to purchase an annuity. (d) A participant cannot elect to purchase an annuity contract with less than $3,500. (1) If a participant who has a traditional balance and a Roth balance elects to use 100% of his or her E:\FR\FM\04MYR1.SGM 04MYR1 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations withdrawal to purchase a life annuity and both the traditional balance and the Roth balance are below $3,500, the TSP will reject the participant’s 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 at least $3,500 to purchase an annuity in accordance with the participant’s election. (2) If a participant who has a Roth balance and traditional balance makes a mixed withdrawal election and both the traditional portion of the amount designated to purchase an annuity and the Roth portion of the amount designated to purchase an annuity are below $3,500, the TSP will reject the withdrawal request. If only one portion is below $3,500, then the TSP will pro rate that portion among the participant’s other elected withdrawal options and use the portion that is at least $3,500 to purchase an annuity in accordance with the participant’s election. (e) The TSP will purchase the annuity from the TSP’s annuity vendor using the participant’s entire account balance or the portion specified, unless an amount must be paid directly to the participant to satisfy any applicable minimum distribution requirement of the Internal Revenue Code. In the event that a minimum distribution is required by section 401(a)(9) of the Internal Revenue Code before the date of the first annuity payment, the TSP will compute that amount, and pay it directly to the participant. * * * * * (i) If the TSP must purchase two annuity contracts, the type of annuity, the annuity features, and the joint annuitant (if applicable) selected by the participant will apply to both annuities purchased. A participant cannot elect more than one type of annuity by which to receive a withdrawal, or portion thereof, from any one account. * * * * * ■ 33. Revise § 1650.23 to read as follows: erowe on DSK2VPTVN1PROD with RULES § 1650.23 Accounts of less than $200. Upon receiving information from the employing agency that a participant has been separated for more than 31 days and that any outstanding loans have been closed, the TSP record keeper will distribute the entire amount of his or her account balance if the account balance is $5.00 or more but less than $200. The TSP will not pay this amount by EFT. The participant may not elect to leave this amount in the TSP, nor will the TSP transfer this amount to an eligible employer plan, traditional IRA, or Roth IRA. However, the participant VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 26427 may elect to roll over this payment into an eligible employer plan, traditional IRA, or Roth IRA to the extent the roll over is permitted by the Internal Revenue Code. ■ 34. Revise § 1650.24 to read as follows: (e) The TSP will transfer distributions only to the extent that the transfer is permitted by the Internal Revenue Code. ■ 36. Amend § 1650.31 by revising the first sentence in paragraph (a) and revising paragraph (b) to read as follows: § 1650.24 How to obtain a postemployment withdrawal. (a) A participant who has reached age 591⁄2 and who has not separated from Government service is eligible to withdraw all or a portion of his or her vested TSP account balance in a single payment. * * * (b) An age-based withdrawal is an eligible rollover distribution, so a participant may request that the TSP transfer all or a portion of the withdrawal to a traditional IRA, an eligible employer plan, or a Roth IRA in accordance with § 1650.25. * * * * * ■ 37. Amend § 1650.41 by revising the second sentence to read as follows: To request a post-employment withdrawal, a participant must submit to the TSP record keeper a properly completed paper TSP post-employment withdrawal request form or use the TSP Web site to initiate a request. ■ 35. In Subpart C, add § 1650.25 to read as follows: § 1650.25 Transfers from the TSP. (a) The TSP will, at the participant’s election, transfer all or any portion of an eligible rollover distribution (as defined by section 402(c)(4) of the Internal Revenue Code) of $200 or more directly to an eligible employer plan or an IRA. (b) If a withdrawal includes a payment from a participant’s traditional balance and a payment from the participant’s Roth balance, the TSP will, at the participant’s election, transfer all or a portion of the payment from the traditional balance to a single plan or IRA and all or a portion of the payment from the Roth balance to another plan or IRA. The TSP will also allow the traditional and Roth portions of a payment to be transferred to the same plan or IRA but, for each type of balance, the election must be made separately by the participant and each type of balance will be transferred separately. However, the TSP will not transfer portions of the participant’s traditional balance to two different institutions or portions of the participant’s Roth balance to two different institutions. (c) If a withdrawal includes an amount from a participant’s Roth balance and the participant elects to transfer that amount to another eligible employer plan or Roth IRA, the TSP will inform the plan administrator or trustee of the start date of the participant’s Roth 5 year non-exclusion period or the participant’s Roth initiation date, and the portion of the distribution that represents Roth contributions. If a withdrawal includes an amount from a participant’s Roth balance and the participant does not elect to transfer the amount, the TSP will inform the participant of the portion of the distribution that represents Roth contributions. (d) Tax-exempt contributions can be transferred only if the IRA or plan accepts such funds. PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 § 1650.31 Age-based withdrawals. § 1650.41 How to obtain an age-based withdrawal. * * * A participant’s ability to complete an age-based withdrawal on the Web will depend on his or her retirement system coverage, marital status, and whether or not all or part of the withdrawal will be transferred to an eligible employer plan, traditional IRA, or Roth IRA. PART 1651—DEATH BENEFITS 38. Revise the authority citation for part 1651 to read as follows: ■ Authority: 5 U.S.C. 8424(d), 8432d, 8432(j), 8433(e), 8435(c)(2), 8474(b)(5) and 8474(c)(1). 39. Amend § 1651.3 by adding paragraph (c)(8) to read as follows: ■ § 1651.3 Designation of beneficiary. * * * * * (c) * * * (8) Not attempt to designate beneficiaries for the participant’s traditional balance and the participant’s Roth balance separately. * * * * * ■ 40. Amend § 1651.14, by: ■ a. Redesignating paragraphs (d) through (i) as paragraphs (c)(1) through (c)(6), respectively; and ■ b. Revising paragraphs (a) through newly redesignated paragraph (c) introductory text and newly redesignated paragraph (c)(4) to read as follows: § 1651.14 How payment is made. (a) Each beneficiary’s death benefit will be disbursed pro rata from the participant’s traditional and Roth balances. The payment from the E:\FR\FM\04MYR1.SGM 04MYR1 26428 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations erowe on DSK2VPTVN1PROD with RULES traditional balance will be further pro rated between the tax-deferred balance and tax-exempt balance. The payment from the Roth balance will be further pro rated between contributions in the Roth balance and earnings in the Roth balance. In addition, all death benefits will be disbursed pro rata from all TSP Funds in which the deceased participant’s account is invested. All pro rated amounts will be based on the balances in each TSP Fund or source of contributions on the day the disbursement is made. Disbursement will be made separately for each entitled beneficiary. (b) Spouse beneficiaries. The TSP will automatically transfer a surviving spouse’s death benefit to a beneficiary participant account (described in § 1651.19) established in the spouse’s name. The TSP will not maintain a beneficiary participant account if the balance of the beneficiary participant account is less than $200 on the date the account is established. The Agency also will not transfer this amount or pay it by electronic funds transfer. Instead the spouse will receive an immediate distribution in the form of a check. (c) Nonspouse beneficiaries. The TSP record keeper will send notice of pending payment to each beneficiary. Payment will be sent to the address that is provided on the participant’s TSP designation of beneficiary form unless the TSP receives written notice of a more recent address. All beneficiaries must provide the TSP record keeper with a taxpayer identification number; i.e., Social Security number (SSN), employee identification number (EIN), or individual taxpayer identification number (ITIN), as appropriate. The following additional rules apply to payments to nonspouse beneficiaries: * * * * * (4) Payment to inherited IRA on behalf of a nonspouse beneficiary. If payment is to an inherited IRA on behalf of a nonspouse beneficiary, the check will be made payable to the account. Information pertaining to the inherited IRA must be submitted by the IRA trustee. A payment to an inherited IRA will be made only in accordance with the rules set forth in 5 CFR 1650.25. * * * * * ■ 41. Amend § 1651.17 by revising paragraphs (c) and (d) to read as follows: § 1651.17 Disclaimer of benefits. * * * * * (c) Invalid disclaimer. A disclaimer is invalid if it: (1) Is revocable; (2) Directs to whom the disclaimed benefit should be paid; or VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 (3) Specifies which balance (traditional, Roth, or tax-exempt) is to be disclaimed. (d) Disclaimer effect. The disclaimed share will be paid as though the beneficiary predeceased the participant, according to the rules set forth in § 1651.10. Any part of the death benefit which is not disclaimed will be paid to the disclaimant pursuant to § 1651.14. ■ 42. Amend § 1651.19 by adding paragraph (c)(3) and revising paragraph (m)(3) to read as follows: § 1651.19 Beneficiary participant accounts. * * * * * (c) * * * (3) The TSP will disburse minimum distributions pro rata from the beneficiary participant’s traditional balance and the beneficiary participant’s Roth balance. * * * * * (m) * * * (3) If a uniformed services beneficiary participant account contains tax-exempt contributions, any payments or withdrawals from the account will be distributed pro rata from the taxdeferred balance and the tax-exempt balance; * * * * * PART 1653—COURT ORDERS AND LEGAL PROCESSES AFFECTING THRIFT SAVINGS PLAN ACCOUNTS 43. Revise the authority citation for part 1653 to read as follows: ■ Authority: 5 U.S.C. 8432d, 8435, 8436(b), 8437(e), 8439(a)(3), 8467, 8474(b)(5) and 8474(c)(1). 44. Amend § 1653.2 by revising paragraphs (b)(2) and (5), removing the period and adding ‘‘; and’’ to the end of paragraph (b)(6), and adding paragraph (b)(7) to read as follows: ■ § 1653.2 Qualifying retirement benefits court orders. * * * * * (b) * * * (2) An order relating to a TSP account that contains only nonvested money, unless the money will become vested within 30 days of the date the TSP receives the order if the participant were to remain in Government service; * * * * * (5) An order that does not specify the account to which the order applies, if the participant has both a civilian TSP account and a uniformed services TSP account; and * * * * * (7) An order that designates the TSP Fund, source of contributions, or PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 balance (e.g. traditional, Roth, or taxexempt) from which the payment or portions of the payment shall be made. ■ 45. Amend § 1653.3 by revising paragraph (f)(4)(iv) to read as follows: § 1653.3 Processing retirement benefits court orders. * * * * * (f) * * * (4) * * * (iv) Information and the form needed to transfer the payment to an eligible employer plan, traditional IRA, or Roth IRA (if the payee is the current or former spouse of the participant); and * * * * * ■ 46. Amend § 1653.5 by revising paragraphs (a)(1)(i), (d), and (e)(1), and by adding paragraphs (m) and (n) to read as follows: § 1653.5 Payment. (a) * * * (1) * * * (i) The payee makes a tax withholding election, requests payment by EFT, or requests a transfer of all or a portion of the payment to a traditional IRA, Roth IRA, or eligible employer plan (the TSP decision letter will provide the forms a payee must use to choose one of these payment options); and * * * * * (d) Payment will be made pro rata from the participant’s traditional and Roth balances. The distribution from the traditional balance will be further pro rated between the tax-deferred balance and tax-exempt balance. The payment from the Roth balance will be further pro rated between contributions in the Roth balance and earnings in the Roth balance. In addition, all payments will be distributed pro rata from all TSP Funds in which the participant’s account is invested. All pro rated amounts will be based on the balances in each fund or source of contributions on the day the disbursement is made. The TSP will not honor provisions of a court order that require payment to be made from a specific TSP Fund, source of contributions, or balance. (e) * * * (1) If payment is made to the current or former spouse of the participant, the distribution will be reported to the Internal Revenue Service (IRS) as income to the payee. If the court order specifies a third-party mailing address for the payment, the TSP will mail to the address specified any portion of the payment that is not transferred to a traditional IRA, Roth IRA, or eligible employer plan. * * * * * (m) A payee who is a current or former spouse of the participant may E:\FR\FM\04MYR1.SGM 04MYR1 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations elect to transfer a court-ordered payment to a traditional IRA, eligible employer plan, or Roth IRA. Any election permitted by this paragraph (m) must be made pursuant to the rules described in 5 CFR 1650.25. (n) If the TSP maintains an account (other than a beneficiary participant account) for a court order payee who is the current or former spouse of the participant, the payee can request that the TSP transfer the court-ordered payment to the payee’s TSP account in accordance with the rules described in 5 CFR 1650.25. However, any pro rata share attributable to tax-exempt contributions cannot be transferred; instead it will be paid directly to the payee. ■ 47. Amend § 1653.12 by revising paragraphs (c)(2) by adding paragraph (c)(6) to read as follows: § 1653.12 Qualifying legal processes. * * * * * (c) * * * (2) A legal process relating to a TSP account that contains only nonvested money, unless the money will become vested within 30 days of the date the TSP receives the order if the participant were to remain in Government service; * * * * * (6) A legal process that designates the specific TSP Fund, source of contributions, or balance from which the payment or portions of the payment shall be made. contributions on the day the disbursement is processed. (d) Loan payments, including both principal and interest, will be credited to the participant’s individual account. Loan payments will be credited to the appropriate TSP Fund in accordance with the participant’s most recent contribution allocation. Loan payments will be credited to the participant’s traditional and Roth balances in the same proportion that the loan was distributed from the participant’s account. ■ 50. Amend § 1655.10 by adding paragraph (d) to read as follows: § 1655.10 Loan application process. * * * * * (d) If the TSP maintains a uniformed services account and a civilian account for an individual, a separate loan application must be made for each account. ■ 51. Amend § 1655.15 by revising paragraph (b) to read as follows: § 1655.15 Taxable distributions. * * * * * (b) If a taxable distribution occurs in accordance with paragraph (a) of this section, the Board will notify the participant of the amount and date of the distribution. The Board will report the distribution to the Internal Revenue Service as income for the year in which it occurs. * * * * * PART 1655—LOAN PROGRAM PART 1690—THRIFT SAVINGS PLAN 48. Revise the authority citation for part 1655 to read as follows: ■ 52. The authority citation for part 1690 continues to read as follows: ■ Authority: 5 U.S.C. 8474. Authority: 5 U.S.C. 8432d, 8433(g), 8439(a)(3) and 8474. 49. Amend § 1655.9 by redesignating paragraph (c) as paragraph (d) and revising it and by adding new paragraph (c) to read as follows: ■ § 1655.9 Effect of loans on individual account. erowe on DSK2VPTVN1PROD with RULES * * * * * (c) The loan principal will be disbursed pro rata from the participant’s traditional and Roth balances. The disbursement from the traditional balance will be further pro rated between the tax-deferred balance and tax-exempt balance. The disbursement from the Roth balance will be further pro rated between contributions in the Roth balance and earnings in the Roth balance. In addition, all loan disbursements will be distributed pro rata from all TSP Funds in which the participant’s account is invested. All pro rated amounts will be based on the balances in each TSP Fund or source of VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 53. Amend § 1690.1 as follows: a. Remove the definitions of regular contributions and combat zone compensation. ■ b. Revise the definitions of account or individual account, catch-up contributions, contribution election, employing agency, separation from Government service, source of contributions, tax-deferred balance, and tax-exempt balance. ■ c. Add definitions for bonus contributions, civilian account, civilian employee, employee contributions, Federal civilian retirement system, Ready Reserve, Roth 5 year nonexclusion period, Roth balance, ’Roth contributions, Roth initiation date, Roth IRA, uniformed service member, special or incentive pay, tax-deferred contributions, tax-exempt contributions, traditional balance, traditional contributions, traditional IRA, trusteeto-trustee transfer, and uniformed services account. ■ ■ PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 § 1690.1 26429 Definitions. As used in this chapter: Account or individual account means the account established for a participant in the Thrift Savings Plan under 5 U.S.C. 8439(a). The TSP offers four types of accounts: civilian participant accounts, uniformed services accounts, civilian beneficiary participant accounts, and uniformed services beneficiary participant accounts. Each type of account may contain a traditional balance, a Roth balance, or both. * * * * * Bonus contributions means contributions made by a participant from a bonus as defined in 37 U.S.C. chapter 5. * * * * * Catch-up contributions means TSP contributions from basic pay that are made by participants age 50 and over, which exceed the elective deferral limit of 26 U.S.C. 402(g) and meet the requirements of 5 CFR 1600.23. Civilian account means a TSP account to which contributions have been made by or on behalf of a civilian employee. * * * * * Civilian employee means a TSP participant covered by the Federal Employees’ Retirement System, the Civil Service Retirement System, or equivalent retirement plan. * * * * * Contribution election means a request by an employee to start contributing to the TSP, to change the amount or type of contributions (traditional or Roth) made to the TSP each pay period, or to terminate contributions to the TSP. * * * * * Employee contributions means traditional contributions and Roth contributions. Employee contributions are made at the participant’s election pursuant to § 1600.12 and are deducted from compensation paid to the employee. * * * * * Employing agency means the organization (or the payroll office that services the organization) that employs an individual eligible to contribute to the TSP and that has authority to make personnel compensation decisions for the individual. It includes the uniformed services and their servicing payroll office(s). * * * * * Federal civilian retirement system means the Civil Service Retirement System established by 5 U.S.C. chapter 83, subchapter III, the Federal Employees’ Retirement System established by 5 U.S.C. chapter 84, or E:\FR\FM\04MYR1.SGM 04MYR1 erowe on DSK2VPTVN1PROD with RULES 26430 Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and Regulations any equivalent Federal civilian retirement system. * * * * * Ready Reserve means those members of the uniformed services described at 10 U.S.C. 10142. Roth 5 year non-exclusion period means the period of five consecutive calendar years beginning on the first day of the calendar year in which the participant’s Roth initiation date occurs. It is the period described in section 402A(d)(2)(B) of the Internal Revenue Code. Roth balance means the sum of: (1) Roth contributions and associated earnings; and (2) Amounts transferred to the TSP from a Roth account maintained by an eligible employer plans and earnings on those amounts. Roth contributions means employee contributions made to the participant’s Roth balance which are authorized by 5 U.S.C. 8432d. Roth contributions may be deducted from taxable pay on an after-tax basis or from pay exempt from taxation under 26 U.S.C. 112. Roth initiation date means (1) The earlier of: (i) The actual date of a participant’s first Roth contribution to the TSP; (ii) The ‘‘as of ’’ date or attributable pay date (as defined in § 1605.1 of this subchapter) that established the date of the participant’s first Roth contribution to the TSP; or (iii) The date used, by a plan from which the participant directly transferred Roth money into the TSP, to measure the participant’s Roth five year non-exclusion period. (2) If a participant has a civilian account and a uniformed services account, the Roth initiation date for both accounts will be the same. Roth IRA means an individual retirement plan described in Internal Revenue Code section 408A (26 U.S.C. 408A). * * * * * Separation from Government service means generally the cessation of employment with the Federal Government. For civilian employees it means termination of employment with the U.S. Postal Service or with any other employer from a position that is deemed to be Government employment for purposes of participating in the TSP for 31 or more full calendar days. For uniformed services members, it means the discharge from active duty or the Ready Reserve or the transfer to inactive status or to a retired list pursuant to any provision of title 10 of the United States Code. The discharge or transfer may not be followed, before the end of the 31- VerDate Mar<15>2010 15:04 May 03, 2012 Jkt 226001 day period beginning on the day following the effective date of the discharge, by resumption of active duty, an appointment to a civilian position covered by the Federal Employees’ Retirement System, the Civil Service Retirement System, or an equivalent retirement system, or continued service in or affiliation with the Ready Reserve. Reserve component members serving on full-time active duty who terminate their active duty status and subsequently participate in the drilling reserve are said to continue in the Ready Reserve. Active component members who are released from active duty and subsequently participate in the drilling reserve are said to affiliate with the Ready Reserve. * * * * * Source of contributions means traditional contributions, Roth contributions, Agency Automatic (1%) Contributions, or matching contributions. All amounts in a participant’s account are attributed to one of these four sources. Catch-up contributions, transfers, rollovers, and loan payments are included in the traditional contribution source or the Roth contribution source. Special or incentive pay means pay payable as special or incentive pay under 37 U.S.C. chapter 5. * * * * * Tax-deferred balance means the sum of: (1) All contributions, rollovers, and transfers in a participant’s traditional balance that would otherwise be includible in gross income if paid directly to the participant and earnings on those amounts; and (2) Earnings on any tax-exempt contributions in the traditional balance. The tax-deferred balance does not include tax-exempt contributions. Tax-deferred contributions means employee contributions made to a participant’s traditional balance that would otherwise be includible in gross income if paid directly to the participant. Tax-exempt balance means the sum of tax-exempt contributions within a participant’s traditional balance. It does not include earnings on such contributions. Only a traditional balance in a uniformed services participant account or a uniformed services beneficiary participant account may contain a tax-exempt balance. Tax-exempt contributions means employee contributions made to the participant’s traditional balance from pay which is exempt from taxation by 26 U.S.C. 112. The Federal income tax exclusion at 26 U.S.C. 112 is applicable PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 to compensation for active service during a month in which a uniformed service member serves in a combat zone. The term ‘‘tax-exempt contributions’’ does not include contributions made to the participant’s Roth balance from pay which is exempt from taxation by 26 U.S.C. 112. * * * * * Traditional balance means the sum of: (1) Tax-deferred 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; (5) Agency Automatic (1%) Contributions and associated earnings. Traditional contributions means taxdeferred employee contributions and tax-exempt employee contributions made to the participant’s traditional balance. Traditional IRA means an individual retirement account described in I.R.C. section 408(a) (26 U.S.C. 408(a)) and an individual retirement annuity described in I.R.C. section 408(b) (26 U.S.C. 408(b)) (other than an endowment contract). Trustee-to-trustee transfer or transfer means the payment of an eligible rollover distribution (as defined in section 402(c)(4) of the Internal Revenue Code) from an eligible employer plan or IRA directly to another eligible employer plan or IRA at the participant’s request. * * * * * Uniformed services account means a TSP account to which contributions have been made by or on behalf of a member of the uniformed services. Uniformed service member means a member of the uniformed services on active duty or a member of the Ready Reserve in any pay status. * * * * * [FR Doc. 2012–10630 Filed 5–3–12; 8:45 am] BILLING CODE 6760–01–P FEDERAL LABOR RELATIONS AUTHORITY 5 CFR Parts 2423, 2424, 2425, and 2429 Unfair Labor Practice Proceedings; Negotiability Proceedings; Review of Arbitration Awards; Miscellaneous and General Requirements Federal Labor Relations Authority. AGENCY: E:\FR\FM\04MYR1.SGM 04MYR1

Agencies

Federal Retirement Thrift Investment Board

[Federal Register Volume 77, Number 87 (Friday, May 4, 2012)]
[Rules and Regulations]
[Pages 26417-26430]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-10630]



========================================================================
Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 
Prices of new books are listed in the first FEDERAL REGISTER issue of each 
week.

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


Federal Register / Vol. 77, No. 87 / Friday, May 4, 2012 / Rules and 
Regulations

[[Page 26417]]



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: Final rule.

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

SUMMARY: The Federal Retirement Thrift Investment Board (Agency) is 
amending its regulations to add a Roth feature to the Thrift Savings 
Plan. This final rule also reorganizes regulatory provisions pertaining 
to uniformed services accounts.

DATES: This rule is effective May 7, 2012.

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 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.
    On February 8, 2012, the Agency published a proposed rule with 
request for comments in the Federal Register (77 FR 6504, February 8, 
2012). The Agency received one or more comments from five individuals.
    One individual commented that requiring distributions to be made 
pro rata from participants' Roth and traditional balances is 
disadvantageous to participants who wish to withdraw a portion of their 
account balance within five years after having made their first Roth 
contribution. The Agency is aware that this rule will have tax 
consequences for participants who wish to withdraw a portion of their 
account balance within five years after having made their first Roth 
contribution. The Agency also understands that this rule is unique to 
the TSP.
    The Agency adopted this rule to facilitate the availability of Roth 
contributions as early as possible. To allow participants to designate 
the source of their distributions would require significant 
modifications to Optical Character Recognition (OCR) forms and system 
applications which would delay the availability of Roth contributions. 
The Agency intends to revisit this rule in three to five years.
    Two individuals objected to the pro rata distribution of Roth 
contributions and earnings. The allocation of Roth contributions and 
earnings to a distribution from a Roth TSP balance is dictated by the 
Internal Revenue Code. A distribution from a Roth TSP balance is 
treated differently under the Internal Revenue Code than a distribution 
from a Roth IRA. Roth IRAs are governed by section 408A of the Internal 
Revenue Code, whereas the Roth TSP feature is governed by section 402A 
of the Internal Revenue Code. The ordering rules in section 
408A(d)(4),which provide that the first distributions from a Roth IRA 
are a nontaxable return of contributions until all contributions have 
been returned, do not apply to distributions from a TSP Roth balance. 
Instead, the Agency is required treat distributions from a Roth balance 
as consisting proportionately of contributions and proportionately of 
earnings. See 26 CFR 1.402A-1, Q&A-3.
    One individual suggested that Roth TSP balances should not be 
subject to the required minimum distribution rules provided in section 
401(a)(9) of the Internal Revenue Code. Pursuant to guidance issued by 
the Internal Revenue Service, the Agency must apply the required 
minimum distribution rules with respect to a participant's Roth TSP 
balance in the same manner as any other portion of the participant's 
account balance. See 26 CFR 1.401(k)-1(f)(4).
    Two individuals suggested that the TSP permit in-plan Roth 
rollovers. The Small Business Jobs Act of 2010, Public Law 111-240, 
allowed employer-sponsored plans to offer ``in-plan Roth rollovers.'' 
An in-plan Roth rollover in the context of the TSP would be a transfer 
or rollover of funds from a participant's traditional balance to the 
participant's Roth balance.\1\ However, the Small Business Jobs Act of 
2010 was not effective until September 27, 2010, well after the TSP 
began its work to implement the Roth feature. In addition, the Internal 
Revenue Code places significant limitations on in-plan Roth rollovers. 
For example, the Agency cannot permit a participant to transfer or 
rollover non-Roth TSP funds to a Roth TSP balance unless that 
participant is eligible to make an existing withdrawal election. 
Therefore, a TSP participant who is still employed by the Federal 
government could elect an in-plan Roth rollover only if he/she has 
attained age 59\1/2\. The Agency does not have the authority to expand 
its withdrawal elections without seeking an amendment to its governing 
statute. For these reasons, the Agency has decided to postpone any 
formal consideration of offering in-plan Roth rollovers until after the 
TSP Roth contribution feature is fully implemented.
---------------------------------------------------------------------------

    \1\ The term ``transfer'' as it is used in the Agency's 
regulations, is synonymous with the term ``direct rollover'' as that 
term is used in IRS guidance. The Agency uses the term ``rollover'' 
to refer only to a rollover by the participant within 60 days after 
he/she receives a distribution.
---------------------------------------------------------------------------

Implementation Date

    The Thrift Savings Plan will begin accepting Roth contributions 
from Federal agency and uniformed service payroll offices on May 7, 
2012.

[[Page 26418]]

However, not all agencies or services have completed the technical and 
programmatic modifications of their payroll systems required to 
implement Roth TSP. These agencies or services will require additional 
time to modify their payroll systems and will permit their employees to 
make Roth contributions as soon after May 7, 2012 as they are able.

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 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.
    After the effective date of this rule, 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 is amending Sec.  1600.11 to add an 
election to change the type of employee contributions.
    This final rule also adds 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. This final rule adds 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.\2\
---------------------------------------------------------------------------

    \2\ 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 is revising 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.
    This final rule also removes 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

[[Page 26419]]

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

    This final rule relocates 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 will therefore 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

    This final rule adds 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 whether or not he 
or she continues to make employee contributions.

Transfers and Rollovers Into the TSP

    The Agency is amending 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.\3\
---------------------------------------------------------------------------

    \3\ The term ``trustee-to-trustee transfer'' (or ``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 is revising 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 is also revising 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. This final rule redesignates Sec.  1600.31 
as Sec.  1600.30 and revises 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

[[Page 26420]]

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 is amending 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 newly 
revised Sec.  1600.11, a contribution election includes an election to 
change, add, or terminate any type of contribution. For consistency, 
the Agency is amending 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

    This final rule removes 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 is eliminating 
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)
------------------------------------------------------------------------


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

    This final rule adds definitions to Sec.  1605.1 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 rule 
also sets 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.\4\ The Agency uses ``recharacterization'' and 
``redesignation'' to refer to 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).
---------------------------------------------------------------------------

    \4\ 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 is revising 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.
    The Agency is amending paragraph (c)(1) of Sec.  1605.11 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 is also adding paragraph (c)(12) to 1605.11 in order to provide 
that a participant cannot contribute a makeup contribution with an ``as 
of'' date occurring prior to May 5, 2012 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 is revising 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. This final rule also adds a 
new section, 1650.25, to address rules and procedures pertaining to 
transfers from the TSP.
    Section 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

[[Page 26421]]

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 is amending its regulations to provide that all 
withdrawals, loan distributions, death benefit distributions, court-
ordered payments, and required minimum distributions will be disbursed 
pro rata from a participant's traditional and Roth balance.
    The Agency is also amending its regulations to require 
distributions from a traditional balance to be pro rated between the 
tax-deferred balance and tax-exempt contributions (if any) and to 
require distributions from a Roth balance to be pro rated between 
contributions in the Roth balance and earnings in the Roth balance. 
This requirement is necessary because 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.

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 is amending 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 is amending 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 is 
amending 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 is amending 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 is also amending 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 part 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 is amending 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 is amending 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.

[[Page 26422]]

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.

Submission to Congress and the General Accounting Office

    Pursuant to 5 U.S.C. 810(a)(1)(A), the Agency submitted a report 
containing this rule and other required information to the U.S. Senate, 
the U.S. House of Representatives, and the Comptroller General of the 
United States before publication of this rule in the Federal Register. 
This rule is not a major rule as defined at 5 U.S.C. 814(2).

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.

Thomas K. Emswiler,
Acting Executive Director, Federal Retirement Thrift Investment Board.

    For the reasons stated in the preamble, the Agency amends 5 CFR 
chapter VI as follows:

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

0
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).


0
2-3. 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.
* * * * *

0
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]

0
5. In Subpart B, remove Sec.  1600.13.


Sec.  1600.14  [Redesignated as Sec.  1600.13]

0
6. In Subpart B, redesignate Sec.  1600.14 as Sec.  1600.13.

0
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.

0
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.

0
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.

[[Page 26423]]

    (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.

0
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 more 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 basic pay 
and special or incentive pay (including bonus pay) subject to the 
limits described in Sec.  1600.22. The election may be expressed as a 
whole percentage, a dollar amount, or both as determined by the 
member's service.

0
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.

0
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:
    (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) 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]

0
13a. In subpart D, redesignate Sec.  1600.31 as Sec.  1600.30.
0
13b. In newly redesignated Sec.  1600.30, 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]

0
14a. In subpart D, redesignate Sec.  1600.32 as Sec.  1600.31.
0
14b. In newly redesignated Sec.  1600.31, revise 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 record keeper 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

[[Page 26424]]

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 record keeper 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.
* * * * *


Sec.  1600.33  [Redesignated as Sec.  1600.32]

0
15. In subpart D, redesignate Sec.  1600.33 as Sec.  1600.32.


Sec.  1600.32  [Amended]

0
16a. 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''.
0
16b. 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 service member 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.

0
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.

0
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

0
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).


0
20. Amend Sec.  1601.13 by revising paragraphs (a)(5) and (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

[[Page 26425]]

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]

0
21. Under the authority of 5 U.S.C. 8474(b)(5), remove and reserve part 
1604.

PART 1605--CORRECTION OF ADMINISTRATIVE ERRORS

0
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 Public Law 104-106, 
110 Stat. 186 and Sec.  7202(m)(2) of Public Law 101-508, 104 Stat. 
1388.


0
23. Amend Sec.  1605.1(b) as follows:
0
a. Revise the definition of attributable pay date;
0
b. In the definition of late contributions, redesignate paragraphs (1) 
through (4) as (i) through (iv), and in newly redesignated paragraph 
(iii), remove ``(1) and (2)'' and add ``(i) and (ii)'' in its place; 
and
0
c. 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:
    (i) The pay date of a contribution that is being redesignated from 
traditional to Roth, or vice versa;
    (ii) 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
    (iii) 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).
    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).

0
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 May 5, 2012 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.

0
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

[[Page 26426]]

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;
* * * * *

0
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.* * *
* * * * *

0
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.

0
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 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%) Contributions and matching contributions 
cannot be redesignated as Roth contributions or recharacterized as tax-
exempt contributions.
    (4) There is no breakage associated with redesignation or 
recharacterization actions.

PART 1650--METHODS OF WITHDRAWING FUNDS FROM THE THRIFT SAVINGS 
PLAN

0
29. Revise the authority citation for part 1650 to read as follows:

    Authority:  5 U.S.C. 8351, 8432d, 8433, 8434, 8435, 8474(b)(5) 
and 8474(c)(1).


0
30. Amend Sec.  1650.2 by revising the section heading and paragraphs 
(f) and (g) and by adding paragraph (h) to read as follows:


Sec.  1650.2  Eligibility and general rules for a TSP withdrawal.

* * * * *
    (f) A participant can elect to have any portion of a single or 
monthly payment that is not transferred to an eligible employer plan, 
traditional IRA, or Roth IRA deposited directly, by electronic funds 
transfer (EFT), into a savings or checking account at a financial 
institution in the United States.
    (g) If a participant has a civilian TSP account and a uniformed 
services TSP account, the rules in this part apply to each account 
separately. For example, the participant is eligible to make one age-
based in-service withdrawal from each account. A separate withdrawal 
request must be made for each account.
    (h) All withdrawals will be distributed pro rata from the 
participant's traditional and Roth balances. The distribution from the 
traditional balance will be further pro rated between the tax-deferred 
balance and tax-exempt balance. The distribution from the Roth balance 
will be further pro rated between contributions in the Roth balance and 
earnings in the Roth balance. In addition, all withdrawals will be 
distributed pro rata from all TSP Funds in which the participant's 
account is invested. All pro rated amounts will be based on the 
balances in each TSP Fund or source of contributions on the day the 
withdrawal is processed.

0
31. Amend Sec.  1650.11 by revising the first sentence in paragraph (c) 
to read as follows:


Sec.  1650.11  Withdrawal elections.

* * * * *
    (c) If a participant's vested account balance is less than $200 
when he or she separates from Government service, the TSP will 
automatically pay the balance to the participant at his or her TSP 
address of record.* * *

0
32. Amend Sec.  1650.14 by:
0
a. Revising paragraph (a);
0
b. Redesignating paragraphs (b) through (d) as paragraphs (f) through 
(h);
0
c. Redesignating existing paragraphs (e) through (g) as (j) through 
(l); and
0
d. Adding new paragraphs (b), (c), (d), (e) and (i).
    The revision and additions read as follows:


Sec.  1650.14  Annuities.

    (a) A participant electing a full post-employment withdrawal can 
use all or a portion of his or her account balance to purchase a life 
annuity.
    (b) If a participant has a traditional balance and a Roth balance, 
the TSP must purchase two separate annuity contracts for the 
participant: One from the portion of the withdrawal distributed from 
his or her traditional balance and one from the portion of the 
withdrawal distributed from his or her Roth balance.
    (c) A participant cannot select only one balance (traditional or 
Roth) from which to purchase an annuity.
    (d) A participant cannot elect to purchase an annuity contract with 
less than $3,500.
    (1) If a participant who has a traditional balance and a Roth 
balance elects to use 100% of his or her

[[Page 26427]]

withdrawal to purchase a life annuity and both the traditional balance 
and the Roth balance are below $3,500, the TSP will reject the 
participant's 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 at least $3,500 to purchase an annuity in 
accordance with the participant's election.
    (2) If a participant who has a Roth balance and traditional balance 
makes a mixed withdrawal election and both the traditional portion of 
the amount designated to purchase an annuity and the Roth portion of 
the amount designated to purchase an annuity are below $3,500, the TSP 
will reject the withdrawal request. If only one portion is below 
$3,500, then the TSP will pro rate that portion among the participant's 
other elected withdrawal options and use the portion that is at least 
$3,500 to purchase an annuity in accordance with the participant's 
election.
    (e) The TSP will purchase the annuity from the TSP's annuity vendor 
using the participant's entire account balance or the portion 
specified, unless an amount must be paid directly to the participant to 
satisfy any applicable minimum distribution requirement of the Internal 
Revenue Code. In the event that a minimum distribution is required by 
section 401(a)(9) of the Internal Revenue Code before the date of the 
first annuity payment, the TSP will compute that amount, and pay it 
directly to the participant.
* * * * *
    (i) If the TSP must purchase two annuity contracts, the type of 
annuity, the annuity features, and the joint annuitant (if applicable) 
selected by the participant will apply to both annuities purchased. A 
participant cannot elect more than one type of annuity by which to 
receive a withdrawal, or portion thereof, from any one account.
* * * * *

0
33. Revise Sec.  1650.23 to read as follows:


Sec.  1650.23  Accounts of less than $200.

    Upon receiving information from the employing agency that a 
participant has been separated for more than 31 days and that any 
outstanding loans have been closed, the TSP record keeper will 
distribute the entire amount of his or her account balance if the 
account balance is $5.00 or more but less than $200. The TSP will not 
pay this amount by EFT. The participant may not elect to leave this 
amount in the TSP, nor will the TSP transfer this amount to an eligible 
employer plan, traditional IRA, or Roth IRA. However, the participant 
may elect to roll over this payment into an eligible employer plan, 
traditional IRA, or Roth IRA to the extent the roll over is permitted 
by the Internal Revenue Code.

0
34. Revise Sec.  1650.24 to read as follows:


Sec.  1650.24  How to obtain a post-employment withdrawal.

    To request a post-employment withdrawal, a participant must submit 
to the TSP record keeper a properly completed paper TSP post-employment 
withdrawal request form or use the TSP Web site to initiate a request.

0
35. In Subpart C, add Sec.  1650.25 to read as follows:


Sec.  1650.25  Transfers from the TSP.

    (a) The TSP will, at the participant's election, transfer all or 
any portion of an eligible rollover distribution (as defined by section 
402(c)(4) of the Internal Revenue Code) of $200 or more directly to an 
eligible employer plan or an IRA.
    (b) If a withdrawal includes a payment from a participant's 
traditional balance and a payment from the participant's Roth balance, 
the TSP will, at the participant's election, transfer all or a portion 
of the payment from the traditional balance to a single plan or IRA and 
all or a portion of the payment from the Roth balance to another plan 
or IRA. The TSP will also allow the traditional and Roth portions of a 
payment to be transferred to the same plan or IRA but, for each type of 
balance, the election must be made separately by the participant and 
each type of balance will be transferred separately. However, the TSP 
will not transfer portions of the participant's traditional balance to 
two different institutions or portions of the participant's Roth 
balance to two different institutions.
    (c) If a withdrawal includes an amount from a participant's Roth 
balance and the participant elects to transfer that amount to another 
eligible employer plan or Roth IRA, the TSP will inform the plan 
administrator or trustee of the start date of the participant's Roth 5 
year non-exclusion period or the participant's Roth initiation date, 
and the portion of the distribution that represents Roth contributions. 
If a withdrawal includes an amount from a participant's Roth balance 
and the participant does not elect to transfer the amount, the TSP will 
inform the participant of the portion of the distribution that 
represents Roth contributions.
    (d) Tax-exempt contributions can be transferred only if the IRA or 
plan accepts such funds.
    (e) The TSP will transfer distributions only to the extent that the 
transfer is permitted by the Internal Revenue Code.

0
36. Amend Sec.  1650.31 by revising the first sentence in paragraph (a) 
and revising paragraph (b) to read as follows:


Sec.  1650.31  Age-based withdrawals.

    (a) A participant who has reached age 59\1/2\ and who has not 
separated from Government service is eligible to withdraw all or a 
portion of his or her vested TSP account balance in a single payment. * 
* *
    (b) An age-based withdrawal is an eligible rollover distribution, 
so a participant may request that the TSP transfer all or a portion of 
the withdrawal to a traditional IRA, an eligible employer plan, or a 
Roth IRA in accordance with Sec.  1650.25.
* * * * *

0
37. Amend Sec.  1650.41 by revising the second sentence to read as 
follows:


Sec.  1650.41  How to obtain an age-based withdrawal.

    * * * A participant's ability to complete an age-based withdrawal 
on the Web will depend on his or her retirement system coverage, 
marital status, and whether or not all or part of the withdrawal will 
be transferred to an eligible employer plan, traditional IRA, or Roth 
IRA.

PART 1651--DEATH BENEFITS

0
38. Revise the authority citation for part 1651 to read as follows:

    Authority:  5 U.S.C. 8424(d), 8432d, 8432(j), 8433(e), 
8435(c)(2), 8474(b)(5) and 8474(c)(1).

0
39. Amend Sec.  1651.3 by adding paragraph (c)(8) to read as follows:


Sec.  1651.3  Designation of beneficiary.

* * * * *
    (c) * * *
    (8) Not attempt to designate beneficiaries for the participant's 
traditional balance and the participant's Roth balance separately.
* * * * *

0
40. Amend Sec.  1651.14, by:
0
a. Redesignating paragraphs (d) through (i) as paragraphs (c)(1) 
through (c)(6), respectively; and
0
b. Revising paragraphs (a) through newly redesignated paragraph (c) 
introductory text and newly redesignated paragraph (c)(4) to read as 
follows:


Sec.  1651.14  How payment is made.

    (a) Each beneficiary's death benefit will be disbursed pro rata 
from the participant's traditional and Roth balances. The payment from 
the

[[Page 26428]]

traditional balance will be further pro rated between the tax-deferred 
balance and tax-exempt balance. The payment from the Roth balance will 
be further pro rated between contributions in the Roth balance and 
earnings in the Roth balance. In addition, all death benefits will be 
disbursed pro rata from all TSP Funds in which the deceased 
participant's account is invested. All pro rated amounts will be based 
on the balances in each TSP Fund or source of contributions on the day 
the disbursement is made. Disbursement will be made separately for each 
entitled beneficiary.
    (b) Spouse beneficiaries. The TSP will automatically transfer a 
surviving spouse's death benefit to a beneficiary participant account 
(described in Sec.  1651.19) established in the spouse's name. The TSP 
will not maintain a beneficiary participant account if the balance of 
the beneficiary participant account is less than $200 on the date the 
account is established. The Agency also will not transfer this amount 
or pay it by electronic funds transfer. Instead the spouse will receive 
an immediate distribution in the form of a check.
    (c) Nonspouse beneficiaries. The TSP record keeper will send notice 
of pending payment to each beneficiary. Payment will be sent to the 
address that is provided on the participant's TSP designation of 
beneficiary form unless the TSP receives written notice of a more 
recent address. All beneficiaries must provide the TSP record keeper 
with a taxpayer identification number; i.e., Social Security number 
(SSN), employee identification number (EIN), or individual taxpayer 
identification number (ITIN), as appropriate. The following additional 
rules apply to payments to nonspouse beneficiaries:
* * * * *
    (4) Payment to inherited IRA on behalf of a nonspouse beneficiary. 
If payment is to an inherited IRA on behalf of a nonspouse beneficiary, 
the check will be made payable to the account. Information pertaining 
to the inherited IRA must be submitted by the IRA trustee. A payment to 
an inherited IRA will be made only in accordance with the rules set 
forth in 5 CFR 1650.25.
* * * * *

0
41. Amend Sec.  1651.17 by revising paragraphs (c) and (d) to read as 
follows:


Sec.  1651.17  Disclaimer of benefits.

* * * * *
    (c) Invalid disclaimer. A disclaimer is invalid if it:
    (1) Is revocable;
    (2) Directs to whom the disclaimed benefit should be paid; or
    (3) Specifies which balance (traditional, Roth, or tax-exempt) is 
to be disclaimed.
    (d) Disclaimer effect. The disclaimed share will be paid as though 
the beneficiary predeceased the participant, according to the rules set 
forth in Sec.  1651.10. Any part of the death benefit which is not 
disclaimed will be paid to the disclaimant pursuant to Sec.  1651.14.

0
42. Amend Sec.  1651.19 by adding paragraph (c)(3) and revising 
paragraph (m)(3) to read as follows:


Sec.  1651.19  Beneficiary participant accounts.

* * * * *
    (c) * * *
    (3) The TSP will disburse minimum distributions pro rata from the 
beneficiary participant's traditional balance and the beneficiary 
participant's Roth balance.
* * * * *
    (m) * * *
    (3) If a uniformed services beneficiary participant account 
contains tax-exempt contributions, any payments or withdrawals from the 
account will be distributed pro rata from the tax-deferred balance and 
the tax-exempt balance;
* * * * *

PART 1653--COURT ORDERS AND LEGAL PROCESSES AFFECTING THRIFT 
SAVINGS PLAN ACCOUNTS

0
43. Revise the authority citation for part 1653 to read as follows:

    Authority:  5 U.S.C. 8432d, 8435, 8436(b), 8437(e), 8439(a)(3), 
8467, 8474(b)(5) and 8474(c)(1).

0
44. Amend Sec.  1653.2 by revising paragraphs (b)(2) and (5), removing 
the period and adding ``; and'' to the end of paragraph (b)(6), and 
adding paragraph (b)(7) to read as follows:


Sec.  1653.2  Qualifying retirement benefits court orders.

* * * * *
    (b) * * *
    (2) An order relating to a TSP account that contains only nonvested 
money, unless the money will become vested within 30 days of the date 
the TSP receives the order if the participant were to remain in 
Government service;
* * * * *
    (5) An order that does not specify the account to which the order 
applies, if the participant has both a civilian TSP account and a 
uniformed services TSP account; and
* * * * *
    (7) An order that designates 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.

0
45. Amend Sec.  1653.3 by revising paragraph (f)(4)(iv) to read as 
follows:


Sec.  1653.3  Processing retirement benefits court orders.

* * * * *
    (f) * * *
    (4) * * *
    (iv) Information and the form needed to transfer the payment to an 
eligible employer plan, traditional IRA, or Roth IRA (if the payee is 
the current or former spouse of the participant); and
* * * * *

0
46. Amend Sec.  1653.5 by revising paragraphs (a)(1)(i), (d), and 
(e)(1), and by adding paragraphs (m) and (n) to read as follows:


Sec.  1653.5  Payment.

    (a) * * *
    (1) * * *
    (i) The payee makes a tax withholding election, requests payment by 
EFT, or requests a transfer of all or a portion of the payment to a 
traditional IRA, Roth IRA, or eligible employer plan (the TSP decision 
letter will provide the forms a payee must use to choose one of these 
payment options); and
* * * * *
    (d) Payment will be made pro rata from the participant's 
traditional and Roth balances. The distribution from the traditional 
balance will be further pro rated between the tax-deferred balance and 
tax-exempt balance. The payment from the Roth balance will be further 
pro rated between contributions in the Roth balance and earnings in the 
Roth balance. In addition, all payments will be distributed pro rata 
from all TSP Funds in which the participant's account is invested. All 
pro rated amounts will be based on the balances in each fund or source 
of contributions on the day the disbursement is made. The TSP will not 
honor provisions of a court order that require payment to be made from 
a specific TSP Fund, source of contributions, or balance.
    (e) * * *
    (1) If payment is made to the current or former spouse of the 
participant, the distribution will be reported to the Internal Revenue 
Service (IRS) as income to the payee. If the court order specifies a 
third-party mailing address for the payment, the TSP will mail to the 
address specified any portion of the payment that is not transferred to 
a traditional IRA, Roth IRA, or eligible employer plan.
* * * * *
    (m) A payee who is a current or former spouse of the participant 
may

[[Page 26429]]

elect to transfer a court-ordered payment to a traditional IRA, 
eligible employer plan, or Roth IRA. Any election permitted by this 
paragraph (m) must be made pursuant to the rules described in 5 CFR 
1650.25.
    (n) If the TSP maintains an account (other than a beneficiary 
participant account) for a court order payee who is the current or 
former spouse of the participant, the payee can request that the TSP 
transfer the court-ordered payment to the payee's TSP account in 
accordance with the rules described in 5 CFR 1650.25. However, any pro 
rata share attributable to tax-exempt contributions cannot be 
transferred; instead it will be paid directly to the payee.

0
47. Amend Sec.  1653.12 by revising paragraphs (c)(2) by adding 
paragraph (c)(6) to read as follows:


Sec.  1653.12  Qualifying legal processes.

* * * * *
    (c) * * *
    (2) A legal process relating to a TSP account that contains only 
nonvested money, unless the money will become vested within 30 days of 
the date the TSP receives the order if the participant were to remain 
in Government service;
* * * * *
    (6) A legal process that designates the specific TSP Fund, source 
of contributions, or balance from which the payment or portions of the 
payment shall be made.

PART 1655--LOAN PROGRAM

0
48. Revise the authority citation for part 1655 to read as follows:

    Authority: 5 U.S.C. 8432d, 8433(g), 8439(a)(3) and 8474.


0
49. Amend Sec.  1655.9 by redesignating paragraph (c) as paragraph (d) 
and revising it and by adding new paragraph (c) to read as follows:


Sec.  1655.9  Effect of loans on individual account.

* * * * *
    (c) The loan principal will be disbursed pro rata from the 
participant's traditional and Roth balances. The disbursement from the 
traditional balance will be further pro rated between the tax-deferred 
balance and tax-exempt balance. The disbursement from the Roth balance 
will be further pro rated between contributions in the Roth balance and 
earnings in the Roth balance. In addition, all loan disbursements will 
be distributed pro rata from all TSP Funds in which the participant's 
account is invested. All pro rated amounts will be based on the 
balances in each TSP Fund or source of contributions on the day the 
disbursement is processed.
    (d) Loan payments, including both principal and interest, will be 
credited to the participant's individual account. Loan payments will be 
credited to the appropriate TSP Fund in accordance with the 
participant's most recent contribution allocation. Loan payments will 
be credited to the participant's traditional and Roth balances in the 
same proportion that the loan was distributed from the participant's 
account.

0
50. Amend Sec.  1655.10 by adding paragraph (d) to read as follows:


Sec.  1655.10  Loan application process.

* * * * *
    (d) If the TSP maintains a uniformed services account and a 
civilian account for an individual, a separate loan application must be 
made for each account.

0
51. Amend Sec.  1655.15 by revising paragraph (b) to read as follows:


Sec.  1655.15  Taxable distributions.

* * * * *
    (b) If a taxable distribution occurs in accordance with paragraph 
(a) of this section, the Board will notify the participant of the 
amount and date of the distribution. The Board will report the 
distribution to the Internal Revenue Service as income for the year in 
which it occurs.
* * * * *

PART 1690--THRIFT SAVINGS PLAN

0
52. The authority citation for part 1690 continues to read as follows:

    Authority:  5 U.S.C. 8474.


0
53. Amend Sec.  1690.1 as follows:
0
a. Remove the definitions of regular contributions and combat zone 
compensation.
0
b. Revise the definitions of account or individual account, catch-up 
contributions, contribution election, employing agency, separation from 
Government service, source of contributions, tax-deferred balance, and 
tax-exempt balance.
0
c. Add definitions for bonus contributions, civilian account, civilian 
employee, employee contributions, Federal civilian retirement system, 
Ready Reserve, Roth 5 year non-exclusion period, Roth balance, 'Roth 
contributions, Roth initiation date, Roth IRA, uniformed service 
member, special or incentive pay, tax-deferred contributions, tax-
exempt contributions, traditional balance, traditional contributions, 
traditional IRA, trustee-to-trustee transfer, and uniformed services 
account.


Sec.  1690.1  Definitions.

    As used in this chapter:
    Account or individual account means the account established for a 
participant in the Thrift Savings Plan under 5 U.S.C. 8439(a). The TSP 
offers four types of accounts: civilian participant accounts, uniformed 
services accounts, civilian beneficiary participant accounts, and 
uniformed services beneficiary participant accounts. Each type of 
account may contain a traditional balance, a Roth balance, or both.
* * * * *
    Bonus contributions means contributions made by a participant from 
a bonus as defined in 37 U.S.C. chapter 5.
* * * * *
    Catch-up contributions means TSP contributions from basic pay that 
are made by participants age 50 and over, which exceed the elective 
deferral limit of 26 U.S.C. 402(g) and meet the requirements of 5 CFR 
1600.23.
    Civilian account means a TSP account to which contributions have 
been made by or on behalf of a civilian employee.
* * * * *
    Civilian employee means a TSP participant covered by the Federal 
Employees' Retirement System, the Civil Service Retirement System, or 
equivalent retirement plan.
* * * * *
    Contribution election means a request by an employee to start 
contributing to the TSP, to change the amount or type of contributions 
(traditional or Roth) made to the TSP each pay period, or to terminate 
contributions to the TSP.
* * * * *
    Employee contributions means traditional contributions and Roth 
contributions. Employee contributions are made at the participant's 
election pursuant to Sec.  1600.12 and are deducted from compensation 
paid to the employee.
* * * * *
    Employing agency means the organization (or the payroll office that 
services the organization) that employs an individual eligible to 
contribute to the TSP and that has authority to make personnel 
compensation decisions for the individual. It includes the uniformed 
services and their servicing payroll office(s).
* * * * *
    Federal civilian retirement system means the Civil Service 
Retirement System established by 5 U.S.C. chapter 83, subchapter III, 
the Federal Employees' Retirement System established by 5 U.S.C. 
chapter 84, or

[[Page 26430]]

any equivalent Federal civilian retirement system.
* * * * *
    Ready Reserve means those members of the uniformed services 
described at 10 U.S.C. 10142.
    Roth 5 year non-exclusion period means the period of five 
consecutive calendar years beginning on the first day of the calendar 
year in which the participant's Roth initiation date occurs. It is the 
period described in section 402A(d)(2)(B) of the Internal Revenue Code.
    Roth balance means the sum of:
    (1) Roth contributions and associated earnings; and
    (2) Amounts transferred to the TSP from a Roth account maintained 
by an eligible employer plans and earnings on those amounts.
    Roth contributions means employee contributions made to the 
participant's Roth balance which are authorized by 5 U.S.C. 8432d. Roth 
contributions may be deducted from taxable pay on an after-tax basis or 
from pay exempt from taxation under 26 U.S.C. 112.
    Roth initiation date means
    (1) The earlier of:
    (i) The actual date of a participant's first Roth contribution to 
the TSP;
    (ii) The ``as of '' date or attributable pay date (as defined in 
Sec.  1605.1 of this subchapter) that established the date of the 
participant's first Roth contribution to the TSP; or
    (iii) The date used, by a plan from which the participant directly 
transferred Roth money into the TSP, to measure the participant's Roth 
five year non-exclusion period.
    (2) If a participant has a civilian account and a uniformed 
services account, the Roth initiation date for both accounts will be 
the same.
    Roth IRA means an individual retirement plan described in Internal 
Revenue Code section 408A (26 U.S.C. 408A).
* * * * *
    Separation from Government service means generally the cessation of 
employment with the Federal Government. For civilian employees it means 
termination of employment with the U.S. Postal Service or with any 
other employer from a position that is deemed to be Government 
employment for purposes of participating in the TSP for 31 or more full 
calendar days. For uniformed services members, it means the discharge 
from active duty or the Ready Reserve or the transfer to inactive 
status or to a retired list pursuant to any provision of title 10 of 
the United States Code. The discharge or transfer may not be followed, 
before the end of the 31-day period beginning on the day following the 
effective date of the discharge, by resumption of active duty, an 
appointment to a civilian position covered by the Federal Employees' 
Retirement System, the Civil Service Retirement System, or an 
equivalent retirement system, or continued service in or affiliation 
with the Ready Reserve. Reserve component members serving on full-time 
active duty who terminate their active duty status and subsequently 
participate in the drilling reserve are said to continue in the Ready 
Reserve. Active component members who are released from active duty and 
subsequently participate in the drilling reserve are said to affiliate 
with the Ready Reserve.
* * * * *
    Source of contributions means traditional contributions, Roth 
contributions, Agency Automatic (1%) Contributions, or matching 
contributions. All amounts in a participant's account are attributed to 
one of these four sources. Catch-up contributions, transfers, 
rollovers, and loan payments are included in the traditional 
contribution source or the Roth contribution source.
    Special or incentive pay means pay payable as special or incentive 
pay under 37 U.S.C. chapter 5.
* * * * *
    Tax-deferred balance means the sum of:
    (1) All contributions, rollovers, and transfers in a participant's 
traditional balance that would otherwise be includible in gross income 
if paid directly to the participant and earnings on those amounts; and
    (2) Earnings on any tax-exempt contributions in the traditional 
balance. The tax-deferred balance does not include tax-exempt 
contributions.
    Tax-deferred contributions means employee contributions made to a 
participant's traditional balance that would otherwise be includible in 
gross income if paid directly to the participant.
    Tax-exempt balance means the sum of tax-exempt contributions within 
a participant's traditional balance. It does not include earnings on 
such contributions. Only a traditional balance in a uniformed services 
participant account or a uniformed services beneficiary participant 
account may contain a tax-exempt balance.
    Tax-exempt contributions means employee contributions made to the 
participant's traditional balance from pay which is exempt from 
taxation by 26 U.S.C. 112. The Federal income tax exclusion at 26 
U.S.C. 112 is applicable to compensation for active service during a 
month in which a uniformed service member serves in a combat zone. The 
term ``tax-exempt contributions'' does not include contributions made 
to the participant's Roth balance from pay which is exempt from 
taxation by 26 U.S.C. 112.
* * * * *
    Traditional balance means the sum of:
    (1) Tax-deferred 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;
    (5) Agency Automatic (1%) Contributions and associated earnings.
    Traditional contributions means tax-deferred employee contributions 
and tax-exempt employee contributions made to the participant's 
traditional balance.
    Traditional IRA means an individual retirement account described in 
I.R.C. section 408(a) (26 U.S.C. 408(a)) and an individual retirement 
annuity described in I.R.C. section 408(b) (26 U.S.C. 408(b)) (other 
than an endowment contract).
    Trustee-to-trustee transfer or transfer means the payment of an 
eligible rollover distribution (as defined in section 402(c)(4) of the 
Internal Revenue Code) from an eligible employer plan or IRA directly 
to another eligible employer plan or IRA at the participant's request.
* * * * *
    Uniformed services account means a TSP account to which 
contributions have been made by or on behalf of a member of the 
uniformed services.
    Uniformed service member means a member of the uniformed services 
on active duty or a member of the Ready Reserve in any pay status.
* * * * *

[FR Doc. 2012-10630 Filed 5-3-12; 8:45 am]
BILLING CODE 6760-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.