Legislators are considering allowing federal employees to deposit the cash value of unused sick leave and vacation time into their Thrift Savings Plan accounts.

The IRS in September allowed private-sector employers to "buy back" unused leave from employees and roll the payments into 401(k) accounts. It also allows private-sector employees to deposit those leave payments when they leave their jobs. TSP participants can't do that without congressional action.

Several TSP improvements, such as automatically enrolling new federal employees in the plan, were included in a tobacco bill President Barack Obama signed in June. Rep. Stephen Lynch, D-Mass., said at a Nov. 3 House hearing that it was an oversight to have left out this measure. "Credits for unused sick leave is a great idea. … Shame on us for not anticipating that and putting it in our bill," Lynch said, adding that he wants to move a bill that would do this soon.

Details remain fuzzy. There is no timeline, nor is it clear how often such deposits could be made, said Thomas Trabucco, spokesman for the Federal Retirement Thrift Investment Board.

Unused leave deposits would still count toward annual contribution limits set by the IRS, Trabucco said. Those limits are $16,500 for most employees and $5,500 for those 50 years of age or older.

So far, no one has estimated the cost of the plan, which could be a sticking point as lawmakers strive to make sure legislation is deficit neutral.

It is also unclear how such a benefit would work in conjunction with another new benefit Congress passed into law last month. The Defense Authorization Act allows FERS employees to count unused sick leave as time served in their annuity calculations, which the Congressional Budget Office said will cost an additional $343 million over the next 10 years.

Trabucco said he expects workers would have to choose either to cash in their unused sick leave to invest in TSP or have that unused sick leave time calculated into their annuity payments. Also in question is whether unused leave that is cashed out would be eligible for employer matching funds. Currently, a portion of basic pay is matched, but it is unclear how Congress might act, Trabucco said.

Unions are urging Congress to approve the benefit, especially after Obama praised the IRS' September decision to allow unused leave deposits to 401(k)s.

"We'll make it possible for employees to put payments for unused vacation and sick days into their retirement plan if they wish. Right now, most workers don't have that option," Obama said in his Sept. 5 weekly address.

Union representatives attending a House hearing last week said there's no reason feds should not have the same benefit. They said it would increase participation in the TSP and contribute more funds to employees' retirement accounts, which have been depleted by recent financial turmoil.

"Many of our members carry over the maximum amount of annual leave on a yearly basis, 240 hours, so this could significantly boost their TSP accounts," said Colleen Kelley, president of the National Treasury Employees Union. She and other union officials discussed the proposed benefit at a hearing of the House Oversight and Government Reform subcommittee on the federal workforce, Postal Service and the District of Columbia.

Allowing the lump sum to be deposited in a TSP account — instead of giving it directly to an employee as income — also could save an employee on taxes and other expenses, said Richard Strombotne of the Senior Executives Association.

"One federal retiree who retired late in the year received the payout of her annual leave in a lump sum. When she received the payment, it raised her annual income for that year and triggered the means test for Medicare, leading to an increase in her Medicare premiums," he said.

Strombotne said civilian employees also should be able to deposit bonuses and performance awards into their TSP accounts, just as members of the military can. Others support such a move, including the National Active and Retired Federal Employees Association.

"We suggested allowing depositing bonuses for [Senior Executive Service members] as well, as a way to help them deposit more in their TSPs," said Dan Adcock, NARFE's legislative director, in an interview.

Lawmakers and witnesses at the hearing also debated other possible changes to the TSP, including whether the TSP board should offer a mutual fund option, authorized in the June tobacco legislation. Only a small portion — 1 percent to 4 percent — of federal employees would participate in a mutual fund, said Greg Long, executive director of the Federal Retirement Thrift Investment Board.

Mutual funds can be risky endeavors that require substantial knowledge of financial markets and risk, which makes them a dangerous prospect for employees unfamiliar with volatile stock markets, said Rep. Gerald Connolly, D-Va.

"We have to balance the rights of individual members to take risks with their money, but when we're looking at something that is people's retirement funds, we have to balance [that risk] out," he said. "Not so long ago, the previous administration strongly suggested the idea of desegregating part of Social Security and investing it in the market because it was growing so much healthier … and an awful lot of folks would have found their retirement savings in jeopardy."

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