What Will Happen to Your TSP If You Are Furloughed?

With possible federal sequestration furloughs just around the corner, Thrift Savings Plan enrollees may want to start thinking now about how a smaller paycheck could affect their retirement accounts.

It’s looking more likely that Congress and the White House are going to let sequestration happen. The automatic, across-the-board budget cuts are scheduled to begin taking effect on March 1 -- eight days from now. Several agencies already have said they will need to furlough employees to achieve the total $85 billion in spending cuts the government needs to produce for the rest of fiscal 2013. The Defense Department on Wednesday officially told Congress it will have to furlough most of its 800,000 civilian workers under sequestration. In a memo to employees, outgoing Secretary Leon Panetta said affected workers would receive 30 days’ notice before any furloughs occur, and the department would do what it could to shield benefits.

So, how does this affect TSP accounts?

Employees can opt to contribute a specific dollar amount, or a percentage based upon their pay, to their 401(k)-style retirement accounts. Those who use the percentage method will see a smaller contribution if they are furloughed. For example, if employees contribute 5 percent of their paycheck each pay period to their TSP accounts, then that amount (as well as the government’s matching contribution) will be proportionally reduced if they take a hit on their salary as a result of furlough. TSP enrollees will have to see what they can afford for their nest egg with a smaller paycheck, and adjust accordingly.

“People are going to have to make choices and decisions,” said Kim Weaver, external affairs director for the Federal Retirement Thrift Investment Board.

The board has updated its guidance on how employees’ nonpay status affects their TSP accounts based on “discontinuous” and “continuous” furloughs. Under sequestration, agencies likely will opt for discontinuous furloughs, resulting in employees not working for a few days per pay period across fiscal 2013, as opposed to a consecutive block of time.

Check out the Office of Personnel Management’s guidance on administrative furloughs for more information.

Employees can take a hardship withdrawal loan from their TSP accounts if they are furloughed for less than 30 days. But they cannot take out a loan if they are in unpaid status for 30 days or more. The government considers a furlough of more than 30 calendar days a reduction-in-force; under sequestration, agencies are likely to spread the pain among employees and stagger furloughs over fiscal 2013 rather than deal with RIFs, which can be expensive.

Those who take out loans will be hit with tax penalties if they can’t keep up with their repayments. In certain circumstances, employees in nonpay status can suspend repayment of their loans for up to one year but they must provide the TSP with written documentation of their situation.

Weaver said the board can’t predict how, or if, many employees will adjust their TSP accounts as result of the looming sequester.

Time will tell, and that time is nigh.