All Unpaid Federal Workers Escape Penalty for TSP Loan Defaults

For federal workers who have already missed a paycheck as a result of the partial government shutdown, all concerns have been eased for now with regards to missing TSP loan payments.

For many across the country, they used their TSP retirement savings as security against a loan while the country was in better times. Through payroll withholding, these loans are paid back whether they were initially used for a mortgage or any other use. For employees not getting paid or working for free, there was major concern regarding what would happen with these repayments.

For the pay period between December 23rd and January 5th, federal employee pay distributions are due to be made in January; this is a two-week window during which unpaid status became a reality for around 800,000 people. For those who continued to work despite receiving no pay, they have been promised back pay as soon as funding returns; meanwhile, furloughed employees would also receive back pay assuming legislation in Congress passes.

When will all this happen? Well, this is a difficult question and a reason why defaults on TSP loans have become a topic of conversation. Whenever a loan defaults, it could lead to a 10% early withdrawal fee after being considered a taxable distribution. However, we should note that this only occurs after two missed payments; the borrower will also normally have a chance to get up to date.

TSP Notification

According to an online post, anybody that was current with their loan payments before the shutdown shouldn’t have concerns at missing a payment or two. As soon as retroactive is approved, the correct payments should be submitted, and the loan will be current once again. If we include both uniformed military personnel and federal employees, it’s thought that 740,000 general purpose loans are currently outstanding with another 150,000 home loans outstanding too.

While ‘unpaid’ status normally prevents employees from taking out new loans (through the TSP), the situation is slightly different under a shutdown because assumptions are that anybody who takes a loan under these conditions will be back in employment once the repayments are due. During financial hardship, withdrawals may also be possible for account holders, but their need must be documented (unlike with a loan!).

Recently, a TSP spokeswoman, Kim Weaver, noted how call volume hasn’t yet exceeded what’s normal which suggests financial hardship withdrawals and loans aren’t being requested currently. Of course, we should note that the TSP isn’t affected directly by the government shutdown since it’s a self-funding agency.

Impact on Investment

Aside from TSPs, there are also concerns for regular investments during the shutdown because these also come from payroll withholding and are therefore not being made while in unpaid status. For the 90% of federal employees under FERS, employer contributions are set after judging the salary an individual receives, so these are also affected. Whether you invest or not, all FERS employees receive an automatic 1% contribution of their salary (with a potential for 4% matching contributions).

Fortunately, Weaver also commented on this topic and said that retroactive contributions would be made for personal investments as soon as employees are on paid status again. For those under the Civil Service Retirement plan, no government contributions are awarded.