Below is a NCDOR directive reference the Bailey Settlement. If I had just started contributing to the Thrift Savings Plan in July of 1989, what percentage of my withdrawals are eligible and how would I enter that? "Vesting" Period for Qualifying Federal Retirement Systems
Directive PD-99-1 identifies the Thrift Savings Plan (Plan) as a qualified federal retirement system and explains that the Plan has both an employee and an employer component. The employee component is similar to the State's § 401(k) and § 457 plans and allows the employee to contribute voluntarily to the Plan. The employee is vested in the employee component if the employee first made a contribution to the plan prior to August 12, 1989.
The employer component includes both contributions by the employer of a fixed percentage of the employee's salary and contributions by the employer that match the employee's voluntary contributions. At the time the Directive was issued, the Court had not resolved issues about when an employee is vested under either employer component. It also had not decided how the settlement and future income tax exclusion apply to retirement benefits received from the Plan if the retiree is vested in the employee component but not the employer fixed percentage component.
The Court addressed these issues in its Order Supplementing Order Regarding Class Definition With Respect to the Federal Thrift Savings Plan, which was signed by Judge Thompson on March 26, 1999. The Court ruled that an employee who is vested in the employee component of the plan is also vested in the employer component for matching contributions. The Court further ruled that an employee is vested in the employer fixed percentage component only if the employee had three years of service (two years of service for certain highly ranked employees) as of August 12, 1989. The only exception to the three-year (or two-year) rule is that an employee who died prior to completing the mandatory three years (or two years) is still considered vested if the date of death was on or before August 12, 1989.
It is possible for a participant in the Plan to be vested in the employee component but not in the employer fixed percentage component as of August 12, 1989. The annual tax information statement (Form 1099-R) sent by the Plan to every benefit recipient under the Plan does not distinguish between the various components when reporting the amount distributed during the year. Therefore, a recipient who is vested in one component but not both cannot readily determine the amount to exclude from North Carolina income tax. A recipient can use Form TSP-8, Thrift Savings Plan Participant Statement, to determine how much to exclude each year. When a participant in the Plan ceases employment, the recipient is provided a Form TSP-8. The Form identifies the cash balances in the various components. To determine the proper amount to exclude, the recipient should multiply the annual distribution by a fraction, the numerator of which is the balance of the components in which the recipient is vested as of August 12, 1989, and the denominator of which is the total cash balance of all components. That same fraction is to be used for each year the recipient receives distributions from the Plan.
