The Federal Retirement Thrift Investment Board says offering federal employees an extra loan option through their Thrift Savings Plans to cushion the impact of furloughs would require too much effort to implement and may not help the employees all that much.
Currently, the board offers TSP participants a general loan option that can be used for any reason. However, regulations bar employees from taking out more than one such general loan at a time and also blocks them from taking out new loans within a 60-day window after paying off the previous loan.
Several federal-employee unions have lobbied the board to add a second general purpose loan option to help federal employees deal with reduced paychecks due to sequestration-related furloughs.
But at an Employee Thrift Advisory Council meeting April 22, the board quashed the idea, citing the complexity surrounding the changes.
“It’s not as easy as just saying ‘OK, sure, we’ll change our [regulations] and allow a second loan to be taken out,'” said Kim Weaver, the board’s director of external affairs, in an interview on In Depth with Francis Rose.
The board’s ability to offer general loans is limited by law, according to an April 11 memo written by Greg Long, the executive director of the board.
And even if the board had the authority to implement the extra loan options, doing so would require an extensive effort, including rewriting regulations, reprogramming computer systems and providing updated training to call-center employees.
All told that would require 2,000 hours of additional personnel work and about 23 weeks to implement, Long’s memo stated.
The TSP board also maintains that the extra loan option may not even help furloughed federal employees.
“Allowing a participant to take a second loan in a furlough situation may not be as helpful as it appears,” Long wrote in the memo. “Since a participant who is furloughed would have less take home pay, keeping the payments on two TSP loans current would be more difficult. Failure to keep the payments current would require us to declare the outstanding portion of the loan as a taxable distribution, which would have further financial consequences for the participant.”
Instead, Long recommended TSP participants lower their contributions while they’re furloughed.
Weaver said the recent debate has underscored the “balancing act” the board faces in offering the loan options.
“Congress and many policy thinkers in this area recognize that if you’re putting money away for retirement but you can never get to it no matter what awful situation may occur — and they do occur, certainly — that people would be less likely to contribute to their retirement,” Weaver said. “On the other hand, if they made it too easy for people to just pull money out of their retirement, the tax benefits that you get from contributing to the pre-tax part of the TSP or a 401(k) would be wasted.”