TAX NEWS - June 2010

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Federal Retirement Plans Subject To Tax Levies, DOJ Says

In an opinion that could have far-reaching consequences for federal employees, the Justice Department has ruled that the Thrift Savings Plan, the equivalent of the 401(k) in the public sector, is subject to federal tax levies.

The May 3 ruling — which furnishes the IRS with a new tool for pursuing tax-delinquent federal employees, retirees and military service members - stems from a conflict between the Internal Revenue Code and the Federal Employees' Retirement System Act of 1986. The department's Office of Legal Counsel released the opinion Wednesday.

The office held that the federal tax levy statute overrides provisions in FERSA that say the TSP accounts can not be "assigned or alienated and are not subject to execution, levy, attachment, garnishment or other legal process."

As recently as 2007, the Federal Retirement Thrift Investment Board, which administers the TSP, published a contrary interpretation of the law, finding that the accounts were not subject to levies — and that honoring levies on TSPs would amount to a breach of board members' fiduciary duty.

The board's executive director, Gregory Long, lamented the ruling at a meeting last month. "This is a fight we are likely eventually going to lose," Long said, according to Federal Times, which first reported on the opinion. Long said the IRS would probably sue the board if it refused to comply with the department's ruling.

As of December, tax-delinquent federal employees and service members owed the IRS a combined $3 billion, though it's unclear how many of those are TSP participants, Long said, according to Federal Times.

The OLC opinion said the exemption provisions in FERSA are still useful because they bar private parties from imposing levies on TSP accounts to collect debts other than federal tax liabilities.

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