As any reader of Federal Times knows, the federal workforce faces a near-constant state of change when it comes to pay and benefits.
The new year, for example, brought current federal employees the good news of a 2.6 percent increase in their basic pay — the largest salary increase in over a decade. But other changes that affect federal employees still linger, such as the recently closed Social Security loopholes of 2015 that many retirees had come to rely on. Add to this the general financial instability that all Americans currently face, and it’s never been more important for current and retired feds to stay informed on how the latest financial reforms might affect their present and future.
Here’s a look at the nuances and potential implications of three major reforms hitting the federal workforce this year and beyond:
The Setting Every Community Up for Retirement Enhancement (SECURE) Act
While the SECURE Act (effective Jan. 1, 2020) is a broad piece of legislation with implications for all Americans, it does contain several elements that are especially relevant to federal employees:
- Required minimum distributions (RMDs): The age for RMDs has been increased from 70.5 to 72, providing retirees with greater insulation against running out of money in retirement by delaying forced withdrawals. In addition, this legislation sets the stage for new IRS divisor factors used to calculate RMDs, which are more closely tied to today’s lifespans. Lastly, it’s important to keep in mind that if you turned age 70.5 in 2019 (i.e., you were born before June 30, 1949), you are still required to take an RMD in 2020 even if you have not reached age 72.
- Pre-retirement withdrawals: SECURE provides the ability for new parents to withdraw up to $5,000, without penalty, to cover adoption or childbirth expenses. It also allows a 529 Plan owner to dedicate up to $10,000 of their account toward any eligible recipient’s student loan repayment.
- Inheritance: Before SECURE, retirees were able to pass their retirement assets — TSP, 401(k) or IRA — to their non-spousal heirs, and these heirs could use a “Stretch IRA” to extend their withdrawals (and therefore their tax liabilities) over the course of their lifetimes. SECURE changes this strategy by establishing the broad requirement that the non-spousal inherited IRA must be withdrawn within 10 years, with no calculated withdrawals required yearly.
Family Medical Leave Act (FMLA) reform
Though signed into law on Dec. 20, 2019, reform to the FMLA legislation originally passed in 1993 will first apply to leave taken on or after Oct. 1, 2020.
- Under the reform, federal employees who have been working for at least one year will be eligible for 12 weeks of paid leave to care for a child due to birth, adoption, or foster care placement.
- Employees will be required to return to work for at least the amount of leave taken (or forfeit the paid leave) but this is an important step forward in ensuring the financial stability of government workers and their families.
- Notably, the reform does not apply to agencies and employees that operate outside of Title 5, excluding from coverage all USPS and FAA employees, as well as a large portion of the workforce at VA, TSA, and agencies created by the Financial Institutions Reform, Recovery, and Enforcement Act.
- The Federal Employees Parental Leave Technical Correction Act has been proposed to ensure that all federal employees have access to the new benefit. Members of the non-Title 5 workforce will definitely want to monitor its progress.
Thrift Savings Plan (TSP) Modernization Act
Passed with the purpose of addressing weaknesses in the TSP as compared to other employer-sponsored plans, this legislation was written, in part, at the request of the TSP Board to benefit federal employees as they transition into retirement.
- Previously, the TSP was recognized for its limited set of indexed investment options and extraordinarily low fees, but offered minimal options to employees who desired to withdraw assets in a flexible manner.
- The new rules, which went into effect Sept. 15, 2019, addressed this shortfall. Now, currently employed workers (age 59.5 or older) can take up to four in-service withdrawals per year and retired employees can take up to 12 withdrawals per year (not to exceed one every 30 days).
- The theme of additional flexibility continues to systematic withdrawals, where employees can now change the frequency or amount of a periodic withdrawal at any time during the year.
- Lastly, the legislation allows employees to choose between their Traditional or Roth account when withdrawing funds.
As a final note, it’s worth mentioning that the TSP Board will likely follow through with its plan to open the I Fund to a broader index that includes investments in emerging markets, despite significant congressional opposition, in the relatively near future.
With all of these changes in mind, it’s essential to consider how they might affect you — and, even more importantly, what adjustments you can and should make to keep your long-term financial plans on track.
Greg Klingler, director, wealth management, CFP, ChFEBC, joined the Government Employees’ Benefit Association — a nonprofit promoting access to insurance and investment options — in 2010, serving as director of products and member services. He has since transitioned to focusing solely on wealth management, advising state and federal employees in retirement planning using pensions, survivor pensions, employer sponsored insurance, and retirement plans as well as portfolio analysis, estate planning and college planning.