Proposed TSP Changes During Government Shutdowns

October 6, 2025

A new bill in Congress aims to ease the financial strain government shutdowns place on federal employees by making critical changes to Thrift Savings Plan (TSP) rules.

Introduced by Senator Tim Kaine of Virginia, here’s what the bill would change about TSP:

Treat Government Shutdowns as Financial Hardship Events
Currently, TSP participants must certify that they face a specific “financial hardship” before approved to make a hardship withdrawal. The proposed change would automatically designate any government shutdown lasting two weeks or more as a qualifying hardship. That means federal employees would not have to jump through extra hoops or submit burdensome documentation to tap into their TSP accounts during extended funding lapses.

Eliminate the 10% Penalty on Early TSP Withdrawals
Federal workers under age 59½ who take early withdrawals from their TSP are hit with a 10% penalty in addition to normal income taxes. Under the new proposal, this penalty would be waived during qualifying shutdowns (two weeks or longer). Though the withdrawal would still be taxed as regular income, employees wouldn’t pay the additional surcharge – an added benefit for sure.

Allow Participants to Recontribute (Pay Back) Funds Withdrawn
The big issue in withdrawing from retirement accounts is the permanent loss of future earnings. To mitigate that, the proposed bill would let employees recontribute (pay back) all or part of the funds they withdrew during the shutdown once things are back to normal. That way, their retirement balances could be restored (to the extent possible), helping protect long-term savings and avoiding the full cost of tapping into retirement funds prematurely.

Ensure Federal Employees Can Access TSP Loans During Shutdowns
Under the current TSP rules, if a shutdown is expected to last more than 30 days, the ability to apply for a loan may be limited or blocked. The proposed legislation would eliminate those restrictions and guarantee that federal workers may request and receive TSP loans even in the midst of an extended shutdown, ensuring access to a known borrowing tool during financial disruption.

Suspend Loan Repayments and Automatically Deduct From Back Pay Later
Because TSP loan repayments are typically made via automatic payroll deductions, they wouldn’t be collected during a shutdown due to the employee not receiving a paycheck, and thus the loan could go into a type of non-payment status. To fix that, this bill would pause those scheduled repayments during the shutdown and then recover the missed payments by deducting them from employee’s back pay once the government reopens. That keeps the repayment schedule intact without requiring separate action from the employee; such as having to file a special form or anything else for that matter, it would all be automatic.

Protect Workers From Having Missed Payments Count as Taxable Income
If a TSP loan falls delinquent (not paid back on time), the unpaid amount can be considered taxable income. This means the employee would have to pay income tax on it, and if they are under 59½ years old, they would also face a 10% early withdrawal penalty. The proposed legislation would prevent this from happening during a government shutdown; if payments are missed due to a shutdown, the unpaid amounts would not be treated as taxable income, protecting employees from tax liability or penalty.

As the bill moves forward, federal workers should stay informed about its status and how it could impact their financial planning. Keeping track of these developments ensures you’re ready to take advantage of the new protections if they become law.

If you have questions about TSP, avoiding penalties, or the benefits available to you as a federal employee, we’re here to help. Take a moment to find a Federal Benefits Specialist in your area, or request your Federal Benefits Workbook. Don’t wait, take action today.