Congress lifts limits on TSP contributions

Federal employees will be able to contribute more money to their Thrift Savings Plan accounts beginning next year, thanks to legislation included in an appropriations bill that passed last week.

Under current rules, Federal Employees Retirement System enrollees can only contribute up to 10 percent of their pay to the TSP, the government's 401(k)-style investment program. Civil Service Retirement System employees can contribute only 5 percent of their pay.

The legislation, which President Clinton is expected to sign, raises the maximum employee contribution by 1 percent of salary for the next five years. After that, the limits on the amount of money federal employees can contribute to their TSP funds will be abolished. By 2006, federal employees will only be limited in the amount of money they can contribute to their TSP accounts by the maximum deferral rate set by the IRS. That rate is currently $10,500.

The current percentage-based limits on TSP contributions mean employees who make less than $100,000 cannot contribute up to the IRS limit. A FERS enrollee who makes $50,000 a year, for example, can only contribute $5,000 to his or her TSP account each year. The bill will eventually allow all employees-regardless of income or retirement plan-to make TSP contributions up to the IRS limit.

Senate Appropriations Committee Chairman Ted Stevens, R-Alaska, and Rep. Connie Morella, R-Md. championed the bill in Congress. It was included in the Labor-HHS-Education appropriations bill approved late last week. Morella has fought for passage of this bill for years, calling it "a sensible way to encourage federal employees to take personal responsibility and increase their saving for retirement."

The change will take effect during next year's open season, the period of time starting on May 15 when federal employees can make changes to their TSP contributions. Workers under CSRS will be able to contribute up to 6 percent of their salaries to the TSP, up from 5 percent this year. For those under FERS, contributions limits will rise to 11 percent from 10 percent this year.

In subsequent years leading up to 2006, the maximum contribution level will increase by one percent of salary per year.

The agreement to lift the contribution limit represents a major compromise between Republicans and the Clinton administration. In past years the bill has met opposition in Congress because it could reduce tax revenues, because all TSP contributions are tax-deferred.