The board that oversees the Thrift Savings Plan issued a final rule Wednesday in the Federal Register amending a reamortization rule for loans made from the 401(k)-style retirement plan.
The Federal Retirement Thrift Investment Board’s final rule combines the accrued interest of a loan made out of the TSP with its outstanding principal, allowing the federal employee to repay both figures if they have been allowed to recalculate, or reamortize, their payment schedule.
Any active TSP participant that takes a loan out of their retirement plan account must start repayments with interest within 60 days of the loan’s disbursement. Those repayments can be deducted from their paycheck.
But under certain circumstances, such as a federal employee shifting payroll systems from biweekly to monthly payments or returning from non-pay status like military service or extended family leave, they would be allowed to reamortize their TSP loan.
Previously, the reamortization rule required that the employee first pay any accrued interest prior to outstanding loan principal or current interest, but Wednesday’s final rule combines the accrued interest and loan principal into a single figure repaid directly to the participant’s account.
The FRTIB said the new rule, first proposed on April 18, “would align the TSP’s procedures with the TSP record keeper’s procedures for processing reamortized loan repayments” and would affect approximately 1% of all TSP participant loans.
However, the board noted that all six public comments received on the proposed rule were opposed to it, with some respondents expressing concerns over the cost of compounding interest as a result of the change.
“While the interest paid on the loan will increase due to the compounding of interest, 100 percent of a participant’s repayment, which includes both the principal and interest, is
paid to his or her TSP account,” FRTIB officials said in the final rule. “Also, participants pay no additional loan fees for a reamortization. The TSP record keeper is paid no interest and receives no monetary benefit from a loan reamortization.”
Other respondents expressed concerns that the reamortized loan would have a higher interest rate than the original as a result of the rule change, but FRTIB officials said that current regulations maintain the original terms of the loan during a reamortization and that the amended rule does not change that.
Officials also noted that due to a 2022 rule change, TSP loan reamortization may only occur when a federal employee either experiences a change to their pay cycle or they have entered a nonpay status.
