This week, Sen. Orrin Hatch (R-UT) announced plans that may rankle some of those in the public sector: legislation that would subject Thrift Savings Plans (TSP) to levies for back taxes. TSP is a defined contribution plan for federal employees and retirees as well as for members of the uniformed services. It shouldn’t escape notice that federal employees would include members of Congress.
Why should you care? More than 279,000 federal workers and retirees owe more than $3.4 billion in back income taxes.
I’m not going to be all judge-y about the back tax issue. It is what it is. But the rules about collections should be fair. It shouldn’t be one way for the private sector and another for federal employees.
And that’s where there appears to be a problem.
Under current law, retirement assets are generally not protected against an IRS levy. The IRS can and will take your retirement plans to satisfy tax debts if there are no other assets to pay those debts and especially if there’s evidence of abuse (like making contributions to your plan in order to avoid paying tax obligations). Additionally, retirement plans are countable assets for purposes of negotiating installment plans or settlements, such as an Offers in Compromise. However, if the taxpayer doesn’t actually own the asset (such as, for example, that it’s still in a pension or 401k plan), the IRS can’t seize the asset; they can, however, place a lien on the asset, and take it when the taxpayer finally has access to it.
With a TSP, taxpayers generally don’t have access to their accounts before they have left federal service – it’s like a pension or 401k in that regard. So, as with private-sector retirement accounts, the IRS has rules for levies and liens on TSP accounts, depending on the circumstances. The IRS policy is that if the taxpayer is a current federal employee who is not eligible for a one-time, age-based in-service withdrawal, a levy will attach to the taxpayer’s TSP account but money will not be taken out by the IRS until the taxpayer can withdraw it. If the taxpayer is a current federal employee eligible for a one-time age-based in-service withdrawal or if the taxpayer has left federal employment and still has funds invested in the TSP, the levy attaches the taxpayer’s account. If the taxpayer is receiving regular payments of money from the TSP, the levy attaches to those payments.
The Thrift Investment Board (TIB) takes a different position, stating that the money in a TSP cannot be levied. The TIB relies on language in the statute that seems to imply that such a levy would be prohibited, no matter the circumstances.
The Office of Legal Counsel (OLC) at the Department of Justice, responsible for resolving disputes between federal government agencies, has found differently. The OLC issued a memorandum opinion in 2010 (downloads as a pdf) holding that TSP accounts are, in fact, subject to levy.
The TIB isn’t been satisfied with this memo, claiming that there remains a statutory conflict of law.
In an effort to finally resolve the dispute, Sen. Hatch has proposed an amendment that would clarify that money in a TSP could be subject to levy for back taxes. This formal authorization from Congress would allow the TIB to honor an IRS notice of levy.
This is one of those amendments that makes sense. Clarity and fairness are always a good thing when it comes to taxes and the law. Let’s hope that Congress agrees.
