Doublecheck your TSP beneficiary designations

Ralph Waldo Emerson is credited with the famous quote, “Knowledge is when you learn something new every day. Wisdom is when you let something go every day.” This quote applies to me in my work in federal employee retirement and insurance benefits. I’ve been working in this area since 1985 when I was employed at the FBI and was learning the basics from my supervisor, Patty Ragle, and supervisory special agent, Walt Wilson. 

To this day, I am still learning new things and new ways to use this information to help federal employees and retirees. Here are a few of the “new” things that I’ve learned recently about the Thrift Savings Plan and Federal Employees Group Life Insurance program that may help you understand these two valuable federal employee benefits a little better.

TSP Beneficiary Designations 

I had a recent conversation with Mark Keen, a certified financial planner who writes for the National Active and Retired Federal Employees Association and, like me, presents online training for NARFE members.  

Mark was asking me about contingent beneficiaries named on a TSP-3 (designation of beneficiary form) and how this changed in 2022 under the new TSP service provider. Mark said that under the old system, TSP participants would link contingent beneficiaries to specific primary beneficiaries. In a case when there are multiple primary beneficiaries, and one of the primary beneficiaries dies, the contingent beneficiary linked to the deceased primary beneficiary would receive the deceased primary's share. He went on to say that most financial institutions only pay the contingent beneficiaries when all primary beneficiaries are gone. He related that after presenting a recent estate planning webinar, a NARFE member emailed to say she just redid her beneficiary designations, and that the TSP no longer links contingents to primary beneficiaries and will only pay out to contingents once all primaries are gone (which is in line with most other financial institutions).    

This important fact was not one that I remembered from the changes that took effect in 2022, so I asked TSP Director of External Affairs Kim Weaver, about this. According to Weaver, TSP regulations changed on June 1, 2022, and going forward all primary beneficiaries must be deceased before the TSP will pay out to any contingent beneficiaries. 

Weaver also said one more important thing regarding beneficiary designations: the TSP will continue to pay as they previously did for contingent beneficiaries on TSP-3s submitted before June 1, 2022.  

TSP Beneficiary Participant Accounts 

Individuals who must receive a Required Minimum Distribution from their TSP account in 2024 were recently sent a Minimum Distribution notice. One of my older clients, Lee, received his notice in error because the system that generated the letter wasn’t updated to reflect the new rules that applied in his specific situation, under the Setting Every Community Up for Retirement Enhancement Act or SECURE Act 2.0 signed into law on Dec. 29, 2022.  

Under the new law, individuals born Jan. 1, 1952, through Dec. 31, 1959, must take their first RMD by April 1 of the year after the participant is separated and at least 73 years old. Although Lee is 82 years old, the TSP account he has is a Beneficiary Participant Account inherited from his late wife who was born in 1952 and unfortunately passed away in 2016 at age 64.  

For beneficiary participant accounts, if at the time of death, the spouse was not the applicable age for RMDs, then the first RMD must be taken before Dec. 31 of the year his spouse would have reached the applicable age. In this case, that would be age 73, not 72. Because she was born in 1952, his first RMD is due in 2025, not 2024. The TSP calculates the annual amount of the RMD using his age, the prior year-end account balance, and the IRS Single Life Expectancy Table. Since the calculation is based on his age rather than hers, according to this table, he will need to divide the account balance at the end of 2024 by 9.3 as he will be 83 next year when he must take the first payment.   

When I was talking to Mark Keen I asked him about Lee’s situation and learned another helpful tip which I passed along to Lee. Once the TSP agrees to stop the RMD in 2024, it might make sense to move his balance to an IRA so that he can use the Uniform Life Expectancy table to take his RMD. For example, if the account balance is $500,000 at the end of the year, the RMD from the IRA would be computed using the Uniform Life Expectancy Table for age 83, i.e. $500,000 / 17.7 = $28,249. Using the Single Life Expectancy Table, which the TSP uses, the RMD would be $500,000 / 9.3 = $53,763.   

FEGLI Changes After Retirement 

FEGLI provides basic insurance valued at your salary rounded up to the next thousand plus $2,000, along with optional life insurance protection from your first day on the job throughout your life after retirement.   

At retirement, federal workers must elect how they want their insurance to continue after retirement. For Basic FEGLI, they can choose to have this coverage reduced by 75% starting at age 65 (or at retirement, if later) or reduce by 50% starting at age 65 or retirement, if later, or they can elect for it not to reduce at all.  

There are additional premiums to pay for the 50% and “no reduction” elections which makes the 75% reduction option the most popular, considering that for most people, the need for life insurance goes down after retirement when the kids are often on their own and the house may be paid off or at least close.  

For Option A, valued at $10,000 of additional life insurance, this coverage automatically starts reducing at age 65, or retirement, if later, by 2% a month until it reaches $2,500, where it remains for life. For options B (additional coverage valued at multiples of the final salary rate, up to five times) and C (family coverage worth up to $25,000 on the spouse and $12,500 for each eligible child), the options available at retirement include “no reduction” or “full reduction.” Under the full reduction election, the coverage begins reducing by 2% a month at retirement (or age 65, if later) until it terminates after the fiftieth month. If “no reduction” is elected, the coverage continues and the premiums for Options B and C continue to increase every five years until the final increase at age 80.   

What I didn’t realize until I recently reviewed the FEGLI Handbook, is that if an employee elects to have “no reduction” at the time of retirement, they can later change to “full reduction” for options B and C so that your coverage goes away gradually (2% each month) instead of all at once as it would if you were to cancel the coverage (unless it’s already been more than 50 months since your 65th birthday). Under the “full reduction” election, the reductions don't start (and premiums don't stop) until the second month after you reach age 65. If you die after changing a multiple to full reduction, benefits are paid on whatever amount of that multiple is left at the time of your death.   

Retirees may also change the 50% or no reduction elections for Basic FEGLI to the 75%reduction. You do not get a refund of the additional premiums you paid for the higher level of coverage during the time you had it. It should be noted that if you elected a partial living benefit, you must elect no reduction for your basic insurance. You cannot later cancel that election. 

Additionally, if you have assigned your insurance, you cannot cancel your choice of 5% reduction or no reduction. Only your assignee(s) can cancel your election. 

FEGLI vs. WAEPA 

Although there are quite a few differences between the Worldwide Assurance for Employees of Public Agencies offerings, and FEGLI, both programs cater to the life insurance needs of federal employees. WAEPA says they’ve been “insuring FEDS and their families for more than 80 years.” FEGLI has been around for 70 years as it was established in 1954 and has become the world’s largest group life insurance program in the world, insuring over four million federal employees, retirees and some family members.  

Most life insurance requires medical underwriting to be approved for a policy. For FEGLI, no medical underwriting is required for new hires or for employees who have experienced a qualifying life event such as marriage, divorce, death of your spouse, or birth or adoption of a child. 

On occasion, there have been FEGLI open enrollment periods for employees, with the last one held in 2016. Individuals may generally cancel FEGLI at any time. Employees may cancel a waiver of Basic insurance, Option A, and Option B (but not Option C) so they may re-enroll by providing satisfactory medical information to prove insurability. 

For WAEPA, medical underwriting is generally required, however, you cannot be declined for guaranteed issue coverage under WAEPA for $25,000 to $100,000 in life insurance coverage which is available to new hires younger than 70 who apply within one year of being hired.  

Other options for life insurance are available through an insurance agent or broker and you may also find offers for insurance online.