[Federal Register Volume 66, Number 84 (Tuesday, May 1, 2001)]
[Proposed Rules]
[Pages 21693-21697]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10698]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 66, No. 84 / Tuesday, May 1, 2001 / Proposed 
Rules

[[Page 21693]]



FEDERAL RETIREMENT THRIFT INVESTMENT BOARD

5 CFR Part 1604


Uniformed Services Accounts

AGENCY: Federal Retirement Thrift Investment Board.

ACTION: Proposed rule.

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SUMMARY: The Executive Director of the Federal Retirement Thrift 
Investment Board (Board) proposes to add a new part to its regulations 
explaining the rules under which members of the uniformed services can 
participate in the Thrift Savings Plan (TSP).

DATES: Comments must be received on or before July 2, 2001.

ADDRESSES: Comments may be sent to Patrick J. Forrest, Federal 
Retirement Thrift Investment Board, 1250 H Street, NW., Washington, DC 
20005.

FOR FURTHER INFORMATION CONTACT: Patrick J. Forrest at (202) 942-1661.

SUPPLEMENTARY INFORMATION: The Board administers the TSP, which was 
established by the Federal Employees' Retirement System Act of 1986 
(FERSA), Public Law 99-335, 100 Stat. 514. The TSP provisions of FERSA 
have been codified, as amended, largely at 5 U.S.C. 8351 and 8401-8479. 
The TSP is a tax-deferred retirement savings plan for Federal employees 
which is similar to cash or deferred arrangements established under 
section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)).
    The National Defense Authorization Act for Fiscal Year 2000, Public 
Law 106-65, 113 Stat. 512, as amended by the Floyd D. Spence National 
Defense Authorization Act for Fiscal Year 2001, Public Law 106-398, 114 
Stat. 1654, extended the opportunity to participate in the TSP to 
uniformed services members. The uniformed services include the Army, 
Navy, Air Force, Marine Corps, Coast Guard, Public Health Service, and 
the National Oceanic and Atmospheric Administration. Therefore, 
beginning on October 9, 2001, uniformed services members can elect to 
contribute to the TSP, with contributions to commence in January 2002. 
Generally, uniformed services members are covered by the TSP 
regulations found at 5 CFR chapter VI. However, uniformed services 
members will contribute to the TSP under rules that differ 
substantially from those that apply to civilian accounts; this proposed 
rule supplements TSP regulations to explain those differences.

Analysis

    An eligible employee elects to contribute to the TSP by making a 
contribution election within 60 days after appointment to a TSP-
eligible position or during a TSP open season, as described at 5 CFR 
part 1600. Proposed Sec. 1604.3 supplements part 1600 by explaining 
special open season rules for uniformed services members and by 
describing the initial uniformed services open season to begin October 
9, 2001, and to end January 31, 2002. Proposed Sec. 1604.4 further 
supplements part 1600 by explaining special uniformed services 
contribution rules, most notably those allowing TSP contributions from 
incentive and special pay (including bonuses), and contributions from 
pay that is not subject to Federal income taxation. Uniformed services 
accounts thereby differ from civilian accounts, which consist solely of 
contributions from basic pay that is subject to Federal income 
taxation; to account for these differences, the TSP will maintain 
separate uniformed services and civilian accounts, as described in 
proposedSec. 1604.5.
    The TSP error correction regulations are codified at 5 CFR part 
1605. Proposed Sec. 1604.6 explains a special error correction rule 
that will apply if a uniformed services employing agency fails to 
deduct a TSP contribution from bonus pay. Under the standard error 
correction procedures, a participant can establish a schedule of makeup 
contributions to replace the missed contribution through future payroll 
deductions. That schedule may not exceed four times the number of pay 
periods over which the error occurred. Because bonuses are paid in a 
single monthly pay period, current procedures would limit to four 
months the schedule of makeup contributions relating to a missed bonus 
contribution. The Board believes that four months is insufficient time 
to replace a bonus contribution because the dollar amount of the bonus 
might exceed the uniformed services member's monthly basic pay. 
Therefore, proposed Sec. 1604.6 allows a schedule of makeup 
contributions of up to four times the number of months it would take 
for the service member to earn basic pay equal to the dollar amount of 
the missed contribution.
    The regulations codified at 5 CFR parts 1650, 1651, and 1655 govern 
TSP withdrawals, death benefits, and loans, respectively. Proposed 
Secs. 1604.7, 1604.8, and 1604.10 supplement those regulations. 
Proposed Sec. 1604.7(d) provides for a uniformed services member to use 
the definition of separation from service found at proposed Sec. 1604.2 
to determine whether he or she is eligible for a withdrawal under part 
1650. Other provisions of those sections call for participants to use 
separate forms for uniformed services and civilian accounts, describe 
the spousal rights applicable to uniformed services members, and 
explain how non-taxable sums are treated differently from taxable sums 
when they are distributed from the TSP.
    Under 5 CFR part 1653, a TSP account can be divided in an action 
for divorce, annulment, or legal separation, and is subject to legal 
process relating to child support, alimony, or child abuse. Proposed 
Sec. 1604.9 supplements the part 1653 regulations. Proposed 
Sec. 1604.9(a) pertains to participants for whom the TSP maintains both 
a uniformed services account and a civilian account, and states that a 
court order or legal process must expressly state from which account(s) 
payment is to be made. Proposed Secs. 1604.9(b) and (c) explain how 
non-taxable sums are treated differently from taxable sums when they 
are paid from the TSP pursuant to a court order or legal process.

Regulatory Flexibility Act

    I certify that these regulations will not have a significant 
economic impact on a substantial number of small entities. They will 
affect only employees of the Federal Government.

Paperwork Reduction Act

    I certify that these regulations do not require additional 
reporting under the criteria of the Paperwork Reduction Act of 1980.

[[Page 21694]]

Unfunded Mandates Reform Act of 1995

    Pursuant to the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 602, 
632, 653, 1501-1571, the effects of this regulation on state, local, 
and tribal governments and the private sector have been assessed. This 
regulation will not compel the expenditure in any one year of $100 
million or more by state, local, and tribal governments, in the 
aggregate, or by the private sector. Therefore, a statement under 
section 1532 is not required.

List of Subjects in 5 CFR Part 1604

    Employment benefit plans, Government employees, Military personnel, 
Pensions, Retirement.

    QFor the reasons set out in the preamble, the Board proposes to add 
a new 5 CFR part 1604 to read as follows:

PART 1604--UNIFORMED SERVICES ACCOUNTS

Sec.
1604.1   Applicability.
1604.2   Definitions.
1604.3   Contribution elections.
1604.4   Contributions.
1604.5   Separate service member and civilian accounts.
1604.6   Error correction.
1604.7   Withdrawals.
1604.8   Death benefits.
1604.9   Court orders and legal processes.
1604.10   Loans.

    Authority: 5 U.S.C. 8474(b)(5) and (c)(1); sec. 661(b), Pub. L. 
106-65, 113 Stat. 512, 672 (5 U.S.C. 8440e).


Sec. 1604.1  Applicability.

    This part describes the special features of TSP participation 
applicable to members of the uniformed services. Uniformed services 
members are also covered by the other regulations of 5 CFR chapter VI 
to the extent they do not conflict with the regulations of this part.


Sec. 1604.2  Definitions.

    As used in this part:
    Basic pay means basic pay payable under 37 U.S.C. 204 and 
compensation received under 37 U.S.C. 206.
    Bonus contributions means contributions made by participants from a 
bonus as defined in 37 U.S.C. chapter 5.
    Civilian account means the account to which contributions have been 
made by or on behalf of a civilian employee.
    Civilian employee means a TSP participant covered by the Federal 
Employees' Retirement System, the Civil Service Retirement System, or 
equivalent retirement plans.
    Combat zone compensation means compensation received for active 
service during a month in which a member of the Armed Forces serves in 
a combat zone.
    Combat zone contributions means employee contributions that are 
made from compensation subject to the Federal income tax exclusion at 
26 U.S.C. 112 for combat zone compensation.
    Employee contributions means contributions made by participants 
from basic pay, incentive pay, and special pay (including bonuses).
    Employing agency means the organization that employs an individual 
who is eligible to contribute to the TSP and that has authority to make 
compensation decisions for that employee.
    Federal civilian retirement system means the Civil Service 
Retirement System established by 5 U.S.C. chapter 83, subchapter III, 
the Federal Employees' Retirement System established by 5 U.S.C. 
chapter 84, or any equivalent Federal civilian retirement system.
    Periodic contributions means employee contributions made from 
recurring incentive pay and special pay (including bonuses) as defined 
in 37 U.S.C. chapter 5.
    Ready Reserve means those members of the uniformed services 
described at 10 U.S.C. 10142.
    Regular contributions means employee contributions made from basic 
pay.
    Separation from service means a transfer to inactive status or to a 
retired list pursuant to a provision of title 10, United States Code, 
or a release from active duty that is not followed within 31 full 
calendar days by a resumption of active duty.
    Service member means a member of the uniformed services on active 
duty or a member of the Ready Reserve in any pay status.
    Service member account means the account to which contributions 
have been made by or on behalf of a member of the uniformed services.
    Special and incentive pay means pay payable as special or incentive 
pay under 37 U.S.C. chapter 5.
    TSP record keeper means the entity that is engaged by the Board to 
perform record keeping services for the Thrift Savings Plan. The TSP 
record keeper is the National Finance Center, United States Department 
of Agriculture, located in New Orleans, Louisiana.
    Uniformed services means the Army, Navy, Air Force, Marine Corps, 
Coast Guard, Public Health Service, and the National Oceanic and 
Atmospheric Administration.


Sec. 1604.3  Contribution elections.

    A service member may make contribution elections as described in 5 
CFR part 1600, with the following exceptions:
    (a) Initial uniformed services open season. A service member may 
make a contribution election during an initial uniformed services TSP 
open season beginning October 9, 2001, and ending January 31, 2002. 
Contributions based on an election made on or before December 31, 2001, 
will be deducted from pay the first full pay period of January 2002; 
elections made in January 2002 will be effective during the first full 
pay period after the election is received.
    (b) New service members. An individual who is appointed as a 
service member may make a TSP contribution election within 60 days 
after the effective date of the appointment; contributions based on 
such an election will be made during the first full pay period after 
the election is received.
    (c) Conversion between active duty and Ready Reserve status. A 
service member who converts from Ready Reserve status to active duty 
status (for more than 30 days), or who converts from active duty to 
Ready Reserve status, may make a TSP contribution election within 60 
days after the effective date of the conversion; contributions based on 
such an election will be made during the first full pay period after it 
is received.
    (d) TSP open season elections. In addition to being able to make a 
contribution election during the periods described in paragraphs (a) 
through (c) of this section, as applicable, a service member may make a 
contribution election during any TSP open season thereafter (as 
described at 5 CFR part 1600, subpart B).
    (e) Source of contributions. A service member may elect to 
contribute sums to the TSP from basic pay, incentive pay, and special 
pay (including bonuses). Except for an election to contribute from 
bonuses, all contribution elections must be made during one of the 
periods described in paragraphs (a) through (d) of this section. An 
election pertaining to a bonus contribution may be made before the 
service member receives the bonus pay; however, the service member must 
be making a regular contribution in order to make a bonus contribution. 
A service member may elect to contribute from special or incentive pay 
(including bonuses) in anticipation of receiving such pay (that is, he 
or she does not have to be receiving the special pay or incentive pay 
when the contribution election is made); those elections will take 
effect

[[Page 21695]]

when the service member receives the special or incentive pay.


Sec. 1604.4  Contributions.

    (a) Employee contributions. Subject to the regulations at 5 CFR 
part 1600 and the following limitations, a service member may make 
regular contributions to the TSP from basic pay. If the service member 
makes regular contributions, he or she also may contribute all or a 
portion of incentive pay and special pay (including bonuses) to the 
TSP:
    (1) Temporary percentage limitations. Subject to paragraph (a)(2) 
of this section, the maximum service member TSP regular employee 
contribution (including combat zone contributions) for 2001 is 6 
percent of basic pay per pay period. The maximum contribution will 
increase one percent a year until 2005, after which the percentage of 
basic pay limit will not apply and the maximum contribution will be 
limited only as provided in paragraph (a)(2) of this section.
    (2) Internal Revenue Code limitations. The dollar amount of TSP 
employee contributions is limited by three different provisions of the 
Internal Revenue Code (I.R.C.). If a service member's employee 
contributions exceed any of these limitations, the service member may 
request a refund of employee contributions (and associated earnings) 
from the TSP on the form titled ``Request for Return of Excess Employee 
Contributions to Participant,'' which can be obtained from the TSP 
record keeper. The completed form must be returned to the TSP record 
keeper by February 20 of the year after the excess contributions were 
made.
    (i) Limit on elective deferrals. Section 402(g) of the I.R.C. (26 
U.S.C. 402(g)) places a dollar limit on the amount a person may save on 
a tax-deferred basis through retirement savings plans. (The limit is 
periodically adjusted by the Internal Revenue Service; it is $10,500 in 
2001.) The TSP will not accept any employee contributions that exceed 
the I.R.C. section 402(g) limit. If a service member contributes to a 
civilian TSP account or to another qualified employer plan described at 
I.R.C. sections 401(k), 403(b), or 408(k) (26 U.S.C. 401(k), 403(b), or 
408(k)), and the total employee contributions from taxable income made 
to all plans exceed the I.R.C. section 402(g) limit, he or she may 
request a refund of employee contributions from the TSP to conform with 
the limit. (Combat zone contributions are not taken into consideration 
when determining the application of the I.R.C. section 402(g) limit.)
    (ii) Section 457 limit. If a service member contributes to the TSP 
and to a plan described at I.R.C. section 457 (26 U.S.C. 457) 
(generally, a deferred compensation plan for a state or local 
government or tax-exempt organization), the total amount the service 
member may contribute to all tax-deferred savings plans cannot exceed 
the dollar limit found at section 457(c)(as opposed to the I.R.C. 
section 402(g) limit described in paragraph (a)(2)(i) of this section). 
(The limit is periodically adjusted by the Internal Revenue Service; it 
is $8,500 in 2001.) A service member who contributes to a section 457 
plan should consult that plan's administrator concerning any limit on 
the amount he or she can also contribute to the TSP. (Combat zone 
contributions are not taken into consideration when determining the 
application of the I.R.C. section 457(c) limit.)
    (iii) Limit on contributions to qualified plans. Section 415(c) of 
the I.R.C. (26 U.S.C. 415(c)) also places an annual limit on the 
combined amount that can be contributed to the TSP and to other Federal 
civilian retirement systems (as defined in Sec. 1604.2). (The limit is 
periodically adjusted by the Internal Revenue Service; it is the lesser 
of 25 percent of compensation or $35,000 in 2001.) For purposes of 
applying this limit, compensation includes combat zone compensation. In 
implementation of this law, no employee contribution may be made to the 
TSP for any year to the extent that the sum of the employee's 
contributions to the TSP and to a Federal civilian retirement system, 
when added to the employer's contributions to the TSP for that year, 
would exceed the I.R.C. section 415(c) limit. (If a service member 
contributes to a civilian TSP account and to a service member TSP 
account in a single calendar year, the annual limit on contributions 
will be derived from the participant's combined service member and 
civilian compensation.) Combat zone contributions are taken into 
consideration when determining the application of the I.R.C. section 
415(c) limit.
    (b) Matching contributions. When the Secretary of a military 
department (i.e., the Army, Navy and Air Force) authorizes matching 
contributions for a service member, the service member's regular 
contributions will be matched dollar-for-dollar on the first three 
percent of basic pay contributed to the TSP, and 50 cents on the dollar 
on the next two percent of basic pay contributed. Matching 
contributions only apply to regular contributions. Matching 
contributions are not taken into consideration when determining the 
application of the contribution limits found at I.R.C. sections 402(g) 
and 457 (described in paragraphs (a)(2)(i) and (a)(2)(ii) of this 
section, respectively), but they are taken into consideration when 
determining the application of the contribution limit found at I.R.C. 
section 415 (described in paragraph (a)(2)(iii) of this section).
    (c) Deduction and transmittal of contributions. A service member's 
employing agency will deduct regular contributions from the service 
member's basic pay each pay period based on his or her contribution 
election and will transmit the contributions to the TSP. If a service 
member also elects to make periodic contributions to the TSP, the 
employing agency must deduct (and transmit to the TSP) these 
contributions from the service member's incentive pay or special pay 
(including bonuses), as applicable.


Sec. 1604.5  Separate service member and civilian accounts.

    (a) Separate accounts. Service member accounts are maintained 
separately from civilian accounts. Therefore, service members making 
both civilian and uniformed services TSP contributions will have two 
TSP accounts. For those participants, the accounts are treated 
separately except in the following circumstances:
    (1) If a participant contributes to a service member account and a 
civilian account, the contributions to both accounts together cannot 
exceed the Internal Revenue Code contribution limits described in 
Sec. 1604.4(a)(2).
    (2) An active duty member of the uniformed services may obtain a 
loan from his or her account, as described at Sec. 1604.10, and the 
loan will be disbursed from the uniformed services account. If the TSP 
maintains a service member account and a civilian account for an 
individual, the TSP will calculate the Internal Revenue Code maximum 
loan amount using both account balances, as described in 
Sec. 1604.10(a)(3).
    (b) Transfers between TSP accounts. Service member and civilian TSP 
account balances may be combined through a transfer (thus producing one 
account), and the transferred funds will be treated as employee 
contributions and otherwise invested as described at 5 CFR part 1600. 
Transfers under this section are subject to the following rules:
    (1) An account balance can be transferred once the TSP is informed 
(by the participant's employing agency) that the participant has 
separated from either civilian or uniformed services employment.

[[Page 21696]]

    (2) Combat zone contributions may not be transferred from a 
uniformed services TSP account to a civilian TSP account.
    (3) Transferred funds will be allocated among the TSP's investment 
funds according to the contribution allocation in effect for the 
gaining account.
    (4) If a service member's account balance exceeds $3,500, the 
service member must obtain the consent of his or her spouse before 
transferring the balance into a civilian account. A request for an 
exception to the spousal consent requirement will be evaluated under 
the rules explained in 5 CFR part 1650.
    (5) Before the transfer can be accomplished, any outstanding loans 
from the account to be transferred must be closed as described in 5 CFR 
part 1655.


Sec. 1604.6  Error correction.

    (a) General rule. A service member's employing agency must correct 
the service member's account if, as the result of employing agency 
error, a service member does not receive the TSP contributions to which 
he or she is entitled. Except as provided in paragraph (b) of this 
section, those corrections must be made in accordance with 5 CFR part 
1605.
    (b) Missed bonus contributions. This paragraph (b) applies when an 
employing agency fails to implement a contribution election that was 
properly submitted by a service member requesting that a TSP 
contribution be deducted from bonus pay. Within 30 days of receiving 
the employing agency's acknowledgment of the error, a service member 
may establish a schedule of makeup contributions with his or her 
employing agency to replace the missed contribution through future 
payroll deductions. These makeup contributions can be made in addition 
to any TSP contributions that the service member is otherwise entitled 
to make.
    (1) The schedule of makeup contributions may not exceed four times 
the number of months it would take for the service member to earn basic 
pay equal to the dollar amount of the missed contribution. For example, 
a service member who earns $29,000 yearly in basic pay and who missed a 
$2,500 bonus contribution to the TSP can establish a schedule of makeup 
contributions with a maximum duration of 8 months. This is because it 
takes the service member 2 months to earn $2,500 in basic pay (at 
$2,416.67 per month).
    (2) At its discretion, an employing agency may set a ceiling on the 
length of a schedule of employee makeup contributions. The ceiling may 
not, however, be less than twice the number of months it would take for 
the service member to earn basic pay equal to the dollar amount of the 
missed contribution.


Sec. 1604.7  Withdrawals.

    A service member may withdraw all or a portion of his or her 
account under the rules in 5 CFR part 1650, with the following 
exceptions:
    (a) Separate accounts. If the TSP maintains a service member 
account and a civilian account for an individual, a separate withdrawal 
request must be made for each account.
    (b) Spousal rights. The spouse of a service member participant has 
the same TSP spousal rights as the spouse of a civilian participant 
covered under the Federal Employees' Retirement System; those spousal 
rights in the context of a withdrawal (and the process by which a 
service member may obtain an exception to them) are explained at 5 CFR 
part 1650.
    (c) Combat zone contributions. If a service member account contains 
combat zone contributions, the withdrawal will be distributed pro rata 
from all sources. If a participant requests the TSP to transfer all, or 
a portion, of a withdrawal to an Individual Retirement Account (IRA) or 
other eligible retirement plan, the pro rata share of the withdrawal 
attributable combat zone contributions (if any) cannot be transferred.
    (d) Separation. The definition of separation from service at 
Sec. 1604.2 applies when determining a service member's eligibility for 
a withdrawal.


Sec. 1604.8  Death benefits.

    The account balance of a deceased service member will be paid as 
described at 5 CFR part 1651, with the following exceptions:
    (a) Separate accounts. To designate a beneficiary for a TSP death 
benefit, a service member must file a valid beneficiary designation 
form. If the TSP maintains a service member account and a civilian 
account for an individual, a separate beneficiary designation form must 
be filed for each account.
    (b) Combat zone contributions. If a service member account contains 
combat zone contributions, the death benefit payment will be made pro 
rata from all sources.
    (c) Trustee-to-trustee transfers. The surviving spouse of a TSP 
participant can request the TSP to transfer a death benefit payment to 
an Individual Retirement Account (IRA); the pro rata share attributable 
to combat zone contributions (if any) cannot be transferred.


Sec. 1604.9  Court orders and legal processes.

    A TSP account can be divided in an action for divorce, annulment, 
or legal separation, and is subject to legal process relating to child 
support, alimony, or child abuse. The TSP will make a payment from a 
service member's account under such orders or processes as described at 
5 CFR part 1653, with the following exceptions:
    (a) Separate accounts. To qualify for enforcement against the TSP, 
a court order or legal process must expressly relate to the TSP. 
Therefore, if the TSP maintains a service member account and a civilian 
account for an individual, a qualifying court order or legal process 
must expressly state from which account payment is to be made.
    (b) Combat zone contributions. If a service member account contains 
combat zone contributions, the payment will be made pro rata from all 
sources.
    (c) Trustee-to-trustee transfers. The current or former spouse of a 
TSP participant can request the TSP to transfer a court-ordered payment 
to an Individual Retirement Account (IRA) or other eligible retirement 
plan; the pro rata share attributable to combat zone contributions (if 
any) cannot be transferred.
    (d) Transfer to a TSP account. If the TSP maintains an account for 
a court order payee who is the current or former spouse of the 
participant, the payee can request the TSP to transfer the court-
ordered payment to the payee's TSP account; the pro rata share 
attributable to combat zone contributions (if any) cannot be 
transferred.


Sec. 1604.10  Loans.

    A service member may be eligible for a TSP loan as described at 5 
CFR part 1655, with the following exceptions:
    (a) Separate accounts. If the TSP maintains a service member 
account and a civilian account for an individual:
    (1) A separate loan application must be made for each account;
    (2) A participant may have no more than two loans outstanding from 
each account at any time; one loan from each account may be a loan for 
the purchase of a primary residence;
    (3) The Internal Revenue Code maximum loan amount test, which is 
described in 5 CFR part 1655, will be applied using the combined 
balances in both TSP accounts; and
    (4) Separate TSP loan statements will be issued for each account.
    (b) Spousal rights. Before a loan agreement is approved for a 
service member account, the participant's

[[Page 21697]]

spouse must consent to the loan by signing the loan agreement. A 
request for an exception to the spousal consent requirement will be 
evaluated under the rules explained in 5 CFR part 1650.
    (c) Combat zone contributions. If a service member account contains 
combat zone contributions, the loan will be distributed pro rata from 
all sources; loan repayments will be credited on a similar pro rata 
basis. If a loan is declared a taxable distribution, the pro rata share 
of the loan attributable to combat zone contributions (if any) will not 
be reported as taxable income to the participant.

Roger W. Mehle,
Executive Director, Federal Retirement Thrift Investment Board.
[FR Doc. 01-10698 Filed 4-30-01; 8:45 am]
BILLING CODE 6760-01-P