02-12344. Correction of Administrative Errors; Expanded and Continuing Eligibility; Death Benefits; Loan Program

AGENCY:

Federal Retirement Thrift Investment Board.

ACTION:

Proposed rule with request for comments.

SUMMARY:

The Executive Director of the Federal Retirement Thrift Investment Board (Board) proposes to revise the Board's Uniformed Services Employment and Reemployment Rights (USERRA) regulations regarding Thrift Savings Plan (TSP) contributions and loan payments, and to update the definitions used in those regulations. The Executive Director also proposes to amend the Board's death benefit regulations to allow the spouse of a deceased participant to transfer a TSP death benefit payment to an eligible retirement plan or to the spouse's existing TSP account. Finally, the Executive Director proposes to amend the Board's loan regulations to explain that the Soldier's and Sailors' Civil Relief Act of 1940 allows a participant returning to civilian service from active duty military service to reduce to 6 percent the interest rate owed on a TSP loan for the period of missed TSP loan payments due to military leave.

DATES:

Comments must be received on or before June 17, 2002.

ADDRESSES:

Comments may be sent to Patrick J. Forrest, Federal Retirement Thrift Investment Board, 1250 H Street, NW., Washington, DC 20005. The Board's Fax number is [phone].

FOR FURTHER INFORMATION CONTACT:

Patrick J. Forrest on [phone].

SUPPLEMENTARY INFORMATION:

The Board administers the 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 have been codified, as amended, largely at 5 U.S.C. 8351 and 8401-79. The TSP is a tax-deferred retirement savings plan for Federal civilian employees and members of the uniformed services which is similar to cash or deferred arrangements established under section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)).

Contributions

Section 4(a)(1) of the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), codified at 5 U.S.C. 8351(b)(8) and 8432b, describes the rights to TSP benefits afforded to civilian TSP participants who are reemployed in civilian service or restored from a nonpay status to pay status following a release from military service, discharge from hospitalization related to that service, or other similar event. On June 9, 1999, the Board published a final rule in the Federal Register (64 FR 31052) to explain how TSP participants can obtain the benefits of USERRA. The rule is codified at 5 CFR part 1620, subpart E; this proposed rule amends the final rule.

Current § 1620.42 explains that a participant can make up TSP contributions missed due to military service if he or she is reemployed or restored to pay status in the civilian service under USERRA. It provides that a participant can file a contribution election immediately when he or she returns to civilian service under USERRA, and does not have to wait for an Open Season to begin making current TSP contributions. Section 1620.42 does not place a time limit on making an immediate contribution election under USERRA. Under 5 CFR 1600.12(a)(1) and 1604.3(b), new civilian employees and service members can file a TSP contribution election any time within the first 60 days of their hiring or appointment, without waiting for a TSP Open Season. Experience has shown this to be an adequate time for making a contribution election. Therefore, the Executive Director proposes to amend § 1620.42 to adopt a 60-day time limit for the filing of contribution elections under USERRA.

The regulation at 5 CFR 1605.31, published by the Board in the Federal Register on August 22, 2001 (66 FR 44276), explains how to compute USERRA makeup contributions. It does not explain how a participant's right to make up contributions under USERRA is affected by contributions the participant made to a uniformed services TSP account under 5 U.S.C. 8440e during his or her period of military service. The Executive Director proposes to revise § 1605.31(c) to explain that the amount of employee makeup contributions must be reduced by the amount the participant contributed to his or her uniformed services TSP account. In addition, proposed § 1605.31(c) explains that a FERS participant who made contributions from basic pay to a uniformed services account during a period of military service will immediately upon return to civilian service or pay status receive agency matching makeup contributions to his or her civilian account for those uniformed services contributions. Finally, proposed § 1605.31(c) explains that a participant who makes up missed employee contributions will receive attributable agency matching contributions to the extent he or she did not receive matching contributions on employee contributions made to a uniformed services account.

Loans and Withdrawals

The repayment of a TSP loan is governed by FERSA, the Internal Revenue Code, and by the regulations issued by the Internal Revenue Service (IRS) and the Board. Section 414(u) of the Internal Revenue Code (26 U.S.C. 414(u)) establishes the Federal income tax rules relating to USERRA. Under section 414(u)(4) and the IRS regulations interpreting that provision (26 CFR 1.72(p)-1, Q&A-9), a retirement plan may suspend a participant's obligation to make loan payments during a period of military service.

Under the Board's current regulations, the TSP will declare a loan to be a taxable distribution if a participant separates from service without repaying the loan or is in nonpay status for more than one year. 5 CFR 1655.13(a)(1), (a)(2). A participant may be eligible to have the taxable distribution reversed if he or she is reemployed or restored to pay status under USERRA. 5 CFR 1620.45(b). If the participant is eligible to have the distribution reversed, the TSP will reinstate the loan so that the participant can resume loan payments, subject to limitations on the term of a TSP loan, or give the participant an opportunity to repay the loan in full. If reinstated, a general purpose TSP loan must be repaid within five years of disbursement; a residential TSP loan must be repaid within 18 years of disbursement.

The Executive Director proposes to amend § 1620.45 to provide for the suspension of loan payments for a participant who enters nonpay status to perform military service beyond one year, thereby avoiding a taxable distribution. Interest will accrue on the loan during the period that payments are suspended. When the participant returns to pay status, the loan payments will resume and the period of military service will be added to the loan repayment period. Therefore, the participant or the employing agency must notify the TSP record keeper of the beginning and ending dates of military service.

Under the proposed amendment, the TSP will continue to close a loan account and declare a taxable distribution if a participant separates from government employment and does not repay the loan, or if the participant is in nonpay status for more than one year and the TSP does not receive documentation that the nonpay status is due to military service. However, if the participant in fact separated or entered nonpay status to perform military service, he or she can later request that the loan be reinstated when the participant is reemployed or returns to pay status under USERRA.

Current § 1620.45(c) allows a participant who is reemployed pursuant to USERRA one year to decide whether to reinstate a loan or to return a mandatory withdrawal that was paid out when the participant separated from civilian service. In analogous situations, where participants are separated from Federal service and later reinstated, TSP regulations give participants 90 days to decide whether to reinstate a loan or return a withdrawal. See 5 CFR 1605.13(d) and (e). In the interest of conformity, the Executive Director proposes to amend § 1620.45 to provide a 90-day period for the same decisions by members of the uniformed services.

The Executive Director also proposes an amendment to the Board's loan regulations which is unrelated to USERRA. The TSP's loan regulations were first published in the Federal Register on January 10, 1990, and amended on November 18, 1996, and August 26, 1998 (55 FR 978, 61 FR 58754, 63 FR 45391, respectively). Those regulations are codified at 5 CFR part 1655. Current § 1655.7 states that the interest rate for a TSP loan is established at the time the loan is approved and remains constant for the life of the loan. However, under the Soldiers' and Sailors' Civil Relief Act of 1940, 50 U.S.C. app. 526, when a person enters active duty military service, no obligation or liability incurred before entry into active duty military service may continue to bear an interest rate in excess of 6 percent per annum. The Board interprets the term “obligation” to apply to a TSP loan because a participant is required by statute and regulation to repay a TSP loan with interest, even though the repayment is to his or her own account. Therefore, the Executive Director is proposing to amend § 1655.7 to provide that a participant who returns to civilian service from active duty military service may request that the interest rate on his or her TSP loan be reduced to 6 percent for the period the participant was in active duty military service. The proposed amendment also explains the process for requesting this benefit.

USERRA Definitions

The Executive Director also proposes to revise the definition section of the USERRA regulation, 5 CFR 1620.41. Specifically, the definitions “basic pay” and “leave without pay” are deleted because they are not used in the regulatory text. In addition, the definitions “current contributions” and “reemployed or reemployment” are simplified; the definition “separation or separated” is rewritten as “separate from civilian service” to conform to the usage in the proposed rule; and the definitions “retroactive period,” “retroactive period beginning date,” and “retroactive period ending date” are updated and condensed into one definition to reflect a recent amendment to FERSA allowing employees who are reemployed or returned to pay status immediately to begin making TSP contributions.

Death Benefits

FERSA provides that a deceased participant's TSP account will be paid to his or her beneficiary or beneficiaries. 5 U.S.C. 8433(e) and 8424(d). The Board's regulations governing the payment of a TSP death benefit were published in the Federal Register on June 13, 1997 (62 FR 32426) and are codified at 5 CFR part 1651.

Current § 1651.14(c) states that a deceased participant's spouse may transfer a TSP death benefit payment to an individual retirement account (IRA), but not to another eligible retirement plan. That provision is based on section 402(c)(9) of the Internal Revenue Code (26 U.S.C. 402(c)(9)), in effect before January 1, 2002. However, the Internal Revenue Code was amended effective January 1, 2002, to provide that a death benefit may be transferred to any eligible retirement plan described at 26 U.S.C. 402(c)(8). See The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, Public Law 107-16, sec. 641(d), 115 Stat. 38, at 120. The Executive Director is proposing to adopt this policy for the TSP by amending § 1651.14(c).

Since the TSP itself is an eligible retirement plan, the Executive Director also proposes to permit the spouse of a deceased TSP participant to transfer a TSP death benefit payment from the deceased participant's account to the spouse's TSP account (if he or she has one). Proposed § 1651.14(c) explains how such a transfer can be requested.

Finally, the proposed rule amends §§ 1651.2, 1651.5, and 1651.14 to substitute the word “spouse” for the words “widow” and “widower.” This change conforms the terms used in the death benefit regulations to those used in TSP publications.

Regulatory Flexibility Act

I certify that these regulations will not have a significant economic impact on a substantial number of small entities. They will affect only employees of the Federal Government.

Paperwork Reduction Act

I certify that these regulations do not require additional reporting under the criteria of the Paperwork Reduction Act of 1980.

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.

List of Subjects

5 CFR Part 1605

• Claims
• Employment benefit plans
• Government employees
• Military personnel
• Pensions
• Retirement

5 CFR Part 1620

• District of Columbia
• Employment benefit plans
• Government employees
• Military personnel
• Pensions
• Retirement

5 CFR Part 1651

• Employment benefit plans
• Government employees
• Pensions
• Retirement

5 CFR Part 1655

• Employment benefit plans
• Government employees
• Military personnel
• Pensions
• Retirement

Roger W. Mehle,

Executive Director, Federal Retirement Thrift Investment Board.

For the reasons set forth in the preamble, the Board proposes to amend 5 CFR chapter VI as follows:

PART 1605—CORRECTION OF ADMINISTRATIVE ERRORS

1. The authority citation for part 1605 is revised to read as follows:

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

Section 1605.14 also issued under Title II, Pub. L. 106-265, 114 Stat. 770.

Subpart D also issued under 5 U.S.C. 8432b(b)(4) and (i); Div. A, Title VI, sec. 661(b), Pub. L. 106-65, 114 Stat. 1654.

Subpart D—Miscellaneous Provisions

2. Section 1605.31 is revised to read as follows:

§ 1605.31

Contributions missed as a result of military service.

(a) Applicability. This section applies to employees who meet the conditions specified at 5 CFR 1620.40 and who are eligible to make up employee contributions or to receive employing agency contributions missed as a result of military service.

(b) Missed employee contributions. An employee who separates or enters nonpay status to perform military service may be eligible to make up TSP contributions when he or she is reemployed or restored to pay status in the civilian service. Eligibility for making up missed employee contributions will be determined in accordance with the rules specified at 5 CFR part 1620, subpart E. Missed employee contributions must be made up in accordance with the rules set out in § 1605.11(c) and the following procedures:

(1) The employing agency will use the contribution election on file for the employee at the time he or she separated or was placed in nonpay status. If an employee terminated TSP contributions within two months before entry into military service, he or she may make a retroactive election to resume contributions for the first open season following the termination. The employee may also make retroactive contribution elections for any open season that occurred during the period of military service, as described at 5 CFR 1620.42.

(2) The pay used to determine the amount of contributions eligible for makeup is the pay the employee would have earned had he or she remained continuously employed in the position held immediately before the separation or placement in nonpay status.

(3) If the employee contributed to a uniformed services TSP account during the period of military service, the amount of employee contributions available for makeup will be reduced by the total amount of employee contributions made to the uniformed services TSP account. (This includes contributions from basic pay, incentive pay, and special pay, including bonus pay.)

(c) Missed agency contributions. A FERS employee who separates or enters nonpay status to perform military service is eligible to receive agency makeup contributions when he or she is reemployed or restored to pay status in the civilian service, as follows:

(1) The employee is entitled to receive the agency automatic (1%) contributions that he or she would have received had the employee remained in civilian service or pay status. Within 60 days of the employee's reemployment or restoration to pay status, the employing agency must calculate the agency automatic (1%) makeup contributions and report those contributions to the record keeper. After the contribution has been reported, the agency must submit lost earnings records for the contribution.

(2) An employee who contributed to a uniformed services TSP account during the period of military service is also immediately entitled to receive agency matching makeup contributions to his or her civilian account for the employee contributions to the uniformed services account that were deducted from his or her basic pay, subject to any reduction in matching contributions required by paragraph (c)(4) of this section. However, an employee is not entitled to receive agency matching makeup contributions on contributions that were deducted from his or her incentive pay or special pay, including bonus pay, while performing military service.

(3) An employee who makes up missed contributions is entitled to receive attributable agency matching makeup contributions (unless the employee has already received the maximum amount of matching contributions, as described in paragraphs (c)(2) and (c)(4) of this section).

(4) If the employee received uniformed services matching contributions, the agency matching makeup contributions will be reduced by the amount of the uniformed services matching contributions.

(d) Lost earnings. The employing agency will submit lost earnings records pursuant to 5 CFR part 1606 for missed agency contributions received by the employee under paragraph (c) of this section. The employee will elect to have the lost earnings calculated using either the rates of return based on the contributions allocation(s) on file for the participant during the period of military service or using the rates of return for the G Fund; the participant must make this election at the same time his or her makeup schedule is established pursuant to § 1606.11(c).

PART 1620—EXPANDED AND CONTINUING ELIGIBILITY

3. The authority citation for part 1620 continues to read as follows:

Authority: 5 U.S.C. 8474(b)(5) and (c)(1).

Subpart C also issued under 5 U.S.C. 8440a(b)(7), 8440b(b)(8), and 8440c(b)(8).

Subpart D also issued under Pub. L. 104-106, sec. 1043(b), 110 Stat. 186, 434-5; and Pub. L. 101-508, sec. 7202(m)(2), 104 Stat. 1388.

Subpart E also issued under 5 U.S.C. 8432b(i) and Div. A, Title VI, sec. 661(b), Pub. L. 106-65, 114 Stat. 1654.

Subpart E—Uniformed Services Employment and Reemployment Rights Act (USERRA)—Covered Military Service

4. Section 1620.41 is revised to read as follows:

§ 1620.41

Definitions.

As used in this subpart:

Current contributions means contributions that must be made for the current pay date which is reported on the journal voucher that accompanies the payroll submission.

Nonpay status means an employer-approved temporary absence from duty.

Reemployed or returned to pay status means reemployed in or returned to a pay status, pursuant to 38 U.S.C. chapter 43, to a position that is subject to 5 U.S.C. 8351 or chapter 84.

Retroactive period means the period for which an employee can make up missed employee contributions and receive retroactive agency contributions. It begins the day after the employee separates or enters nonpay status to perform military service and ends when the employee is reemployed or returned to pay status.

Separate from civilian service means to cease employment with the Federal Government, the U.S. Postal Service, or with any other employer from a position that is deemed to be civilian Government employment for purposes of participating in the TSP, for 31 or more full calendar days.

5. Section 1620.42 is revised to read as follows:

§ 1620.42

Processing TSP contribution elections.

(a) Time for filing election. Upon reemployment or return to pay status, an employee has 60 days to submit contribution elections to make current contributions and to make up missed contributions. An employee's right to make a retroactive TSP contribution election will expire if the election is not made within 60 days of the participant's reemployment or return to pay status. After the 60-day contribution election period expires, the employee must wait for an open season to submit a contribution election to make current contributions.

(b) Current contributions. An election to make current contributions will be effective as soon as administratively feasible, but no later than the first day of the first full pay period after it is received by the employing agency.

(c) Makeup contributions. An election to make up contributions will be processed as follows:

(1) If the employee had a valid contribution election on file when he or she separated or entered nonpay status to perform military service, that election form will be reinstated for purposes of makeup contributions, unless the employee submits new contribution elections effective for any missed open season.

(2) An employee who terminated contributions within two months of entering military service will be eligible to make a retroactive contribution election for the first open season that occurs after the effective date that the contributions were terminated. This election may be made even if the termination was made outside an open season.

6. Section 1620.44 is amended by revising the last sentence to read as follows:

§ 1620.44

Restoring forfeited agency automatic (1%) contributions.

* * * The employing agency will follow the procedure described in § 1620.46(e) to have those funds restored.

7. Section 1620.45 is revised to read as follows:

§ 1620.45

Suspending TSP loans, restoring post-employment withdrawals, and reversing taxable distributions.

(a) Suspending TSP loans during nonpay status. If the TSP is notified that an employee entered into a nonpay status to perform military service, any outstanding TSP loan from a civilian TSP account will be suspended, that is, it will not be declared a taxable distribution while the employee is performing military service.

(1) Interest will accrue on the loan balance during the period of suspension. When the employee returns to civilian pay status, the employing agency will resume the deduction of loan payments from the participant's basic pay and the TSP will reamortize the loan (which will include interest accrued during the period of military service). The loan repayment term will be extended by the employee's period of military service. Consequently, when the employee returns to pay status, the TSP record keeper must receive documentation to show the beginning and ending dates of military service.

(2) If the TSP does not receive documentation that the employee entered into nonpay status to perform military service and the period of missed loan repayments extends beyond one year, the loan will be closed and the outstanding loan balance (including accrued interest) will be declared a taxable distribution. However, the taxable distribution can be reversed in accordance with paragraph (c) of this section.

(b) Restoring post-employment withdrawals. An employee who separates from civilian service to perform military service and who receives an automatic cashout of his or her account may return to the TSP an amount equal to the amount of the payment. The employee must notify the TSP record keeper of his or her intent to return the withdrawn funds within 90 days of the date the employee returns to civilian service or pay status; if the employee is eligible to return a withdrawal, the TSP record keeper will then inform the employee of the actions that must be taken to return the funds.

(c) Reversing taxable distributions. An employee may request that a taxable loan distribution be reversed if the taxable distribution resulted from the employee's separation or placement in nonpay status to perform military service. The TSP will reverse the taxable distribution under the process described as follows:

(1) An employee who received a post-employment withdrawal when he or she separated to perform military service can have a taxable distribution reversed only if the withdrawn amount is returned as described in paragraph (b) of this section;

(2) A taxable loan distribution can be reversed either by reinstating the loan or by repaying it in full. The TSP loan can be reinstated only if the employee agrees to repay the loan within the original loan repayment term plus the length of military service, and if, after reinstatement of the loan, the employee will have no more than two outstanding loans, only one of which is a residential loan; and

(3) The employee must notify the TSP record keeper of his or her intent to reverse a taxable loan distribution within 90 days of the date the employee returns to civilian service or pay status; if the employee is eligible to reverse a taxable loan distribution, the TSP record keeper will then inform the employee of the actions that must be taken to reverse the distribution.

(d) Earnings. Employees will not receive retroactive earnings on amounts returned to their accounts under this section.

PART 1651—DEATH BENEFITS

8. The authority citation for part 1651 is revised to read as follows:

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

9. Section 1651.1 is amended by adding a new definition, in alphabetical order, to read as follows:

§ 1651.1

Definitions.

* * * * *

Eligible retirement plan means an individual retirement account described in I.R.C. section 408(a) (26 U.S.C. 408(a)); an individual retirement annuity described in I.R.C. section 408(b) (26 U.S.C. 408(b)) (other than an endowment contract); a qualified trust; an annuity plan described in I.R.C. section 403(a) (26 U.S.C. 403(a)); an annuity contract described in I.R.C. section 403(b) (26 U.S.C. 403(b)); and an eligible deferred compensation plan described in I.R.C. section 457(b) (26 U.S.C. 457(b)) which is maintained by an eligible employer described in I.R.C. section 457(e)(1)(A) (26 U.S.C. 457(e)(1)(A)).

* * * * *

10. Section 1651.2 is amended by revising paragraph (a)(2) to read as follows:

§ 1651.2

Entitlement to benefits.

(a) * * *

(2) If there is no designated beneficiary, to the spouse of the participant in accordance with § 1651.5;

* * * * *

11. Section 1651.5 is amended by revising the section heading and the first sentence to read as follows:

§ 1651.5

Spouse of the participant.

For purposes of payment under § 1651.2(a)(2), the spouse of the participant is the person to whom the participant was married on the date of death. * * *

12. Section 1651.14 is amended by revising paragraph (c) to read as follows:

§ 1651.14

How payment is made.

* * * * *

(c) Payment to the participant's spouse. The spouse of the participant may request that the TSP transfer all or a portion of the payment to an eligible retirement plan (including the spouse's TSP account, if he or she already has one). A transfer to a spouse's TSP account is permitted only if the spouse is not receiving monthly payments from the account. In order to request such a transfer, a spouse must file Form TSP-13-S, Spouse's Election to Transfer to IRA or Other Eligible Retirement Plan, with the TSP record keeper.

* * * * *

PART 1655—LOAN PROGRAM

13. The authority citation for part 1655 is revised to read as follows:

Authority: 5 U.S.C. 8433(g) and 8474; 50 U.S.C. App. 526.

14. Section 1655.7 is amended by revising paragraph (c) to read as follows:

§ 1655.7

Interest rate.

* * * * *

(c) The interest rate calculated under this section remains fixed until the loan is repaid, unless the participant informs the TSP record keeper that he or she entered into active duty military service and requests that the interest rate on a loan issued before entry into active duty military service be reduced to an annual rate of 6 percent for the period of such service. The participant must provide the record keeper with the beginning and ending dates of active duty military service.