The proposal to exempt the federal employe thrift savings plan from Internal Revenue Service rules limiting employe contributions has been sidetracked in the House by members who feel it would be politically unwise at a time when Congress is talking about major budget cuts and tax increases.
Unless something happens to change the picture, this could mean that high-income federal workers who can now contribute between 5 percent and 10 percent of their salaries to the tax-deferred savings plan will have their contribution rates cut next year, and be given refunds on some of the money they have already contributed.
This is the complicated story: Since April most federal workers have been eligible to participate in a private-sector style 401(k) savings plan, called the Thrift Savings Plan. Employes who are under the old Civil Service Retirement System can contribute 5 percent of their salary to the plan. Those who are under the new Federal Employees Retirement System can contribute 10 percent of salary (up to $7,000 a year for such a tax-deferred investment plan), and also get a 5 percent matching contribution from the government.
Like tax-deferred savings plans in the private sector, the federal Thrift Savings Plan is subject to the IRS antidiscrimination rule. That rule limits the percentage of salary that upper-income ($50,000 per year or more) workers can invest based on the average percentage contribution of lower-income workers eligible to belong to the same plan. Under the rule, upper-income workers can contribute no more than 2 percentage points more than the average contribution rate for lower-income workers. For example, if lower-income workers on average contributed 3 percent to the plan, then upper-income workers could contribute only 5 percent.
The federal Thrift Savings Plan is divided into two groups: those under the old CSRS pension plan and those in the new FERS plan. Although many workers are investing in the savings plan, the amount of salary that lower-income workers have invested so far is low. That threatens to drag down the amount that upper-income workers will be able to contribute.
To remedy this Rep. William Ford (D-Mich.) and others were working with the tax-writing House Ways and Means Committee and the IRS to exempt the federal savings plan from the antidiscrimination rule. Until two weeks ago, it appeared that Congress would quietly approve the exemption, thus protecting current contribution rates for upper-income workers.
But last week the House Democratic leaders balked at the exemption proposal on grounds that it would be inappropriate in this time of budget austerity and when Congress is looking for ways to increase tax revenue. That is bad news for many federal workers, but politically it makes sense.
Insiders say the exemption plan is apparently dead in the House. The Senate, of course, could still approve it and the plan could be approved by Congress later this year or early next year. But if that doesn't happen, upper-income employes -- about 5 percent of the total work force -- could be told next year that their contribution rate is being cut. And the prospect of being able to contribute much less to the savings plan could make a switch to the new retirement plan even less attractive for many upper-income workers.