WHAT
IS A TAX SHELTERED ANNUITY (TSA) 403(b) PLAN?
Tax-Sheltered
Annuity (TSA), is a technical Internal Revenue Code (IRC) term and is governed
by the section of the IRC 403(b) commonly referred to as a 403(b) plan. Employees of non-profit 501(c) tax-exempt
organizations, higher education and public schools are eligible to tax defer
income under this plan for additional retirement savings.
Your
voluntary contributions to a TSA reduce your taxable income (wages) for both
state and federal taxes. Contributions
must be made through your employer. TSA
contributions do not affect Social Security taxes or reported wages for Social
Security. The liability for taxes on the
deferred amount and any interest accrued is postponed until the money is taken
as income, usually at retirement time.
This deferred taxable income plan should not be confused with tax
exempt.
IRC
non-discrimination rules state that an employer offering a tax-sheltered
annuity plan to a group of employees must offer this program to all employees
with some exceptions. Virginia Western
Community College (VWCC) offers participation to all employees with the
exception of those under the work-study program, student employees, and
part-time wage (P-14) employees who normally work fewer than 20 hours per
week. Adjunct faculty are eligible to
participate.
Participation
in a TSA program will reduce your taxes immediately. Every dollar you defer to your TSA is not
subject to ordinary income tax withholding.
So, by participating in the plan you will generally pay less federal and
state income tax. The example shown in
the following table assumes a single employee with one withholding exemption.
Monies
deferred to a TSA account are intended for additional retirement income. Therefore, access to those funds is
restricted prior to retirement. In
addition, even when conditions for early withdrawal are met, there is a
significant tax liability for the monies withdrawn.
POWER OF TAX DEFERRAL
(Single)
|
|
WITHOUT TSA |
WITH TSA |
|
Gross Semi-Monthly Income |
$1,500.00 |
$1,500.00 |
|
Pre-Tax Contribution (403b) |
NONE |
$150.00 |
|
Federal Withholding Tax |
$249.82 |
$207.82 |
|
Combined OASDI & HI (FICA) |
$114.75 |
$114.75 |
|
SIT (State) |
$67.61 |
$58.99 |
|
TAKE HOME PAY |
$1,067.82 |
$968.44 |
RESULTS:
You deferred $150.00 to the TSA, but your take-home pay is only reduced
by $99.38 because of lower taxes for FIT and SIT.
HIGHLIGHTS
OF THE PROGRAM
·
Contributions
from your salary are made on a pre-tax basis and accumulate on a tax-deferred
basis.
·
Immediate
100% vesting is available on all your contributions.
·
Loan
provisions enable you to borrow against your account balance.
·
You
have a wide choice of investment options.
WHAT WILL THE DIFFERENCE BE IN MY W-2?
At
the end of the calendar year, your W-2 will show your adjusted wages for tax
reporting purposes. A separate box on
the W-2 will show the total calendar year deferral amount coded as 403(b)
money. NOTE: You have the benefit of lower taxes up front
all year long because for each pay period taxes were computed on the salary rate
minus the amount of the TSA.
HOW MUCH CAN I DEFER TO A TSA PLAN?
There
are specific limitations on the amount of money you may set aside in a calendar
year. The limitations are imposed by
sections of the IRC; 403(b) and 403(*b), 7, 415, and 402(g). Alternative limits are available to employees
of educational institutions and permit those who qualify to exceed the general
limit on deferrals. Generally, you may
defer as much as $15,500 per calendar year ($20,500 if over age 50), on a
before-tax basis. Under section 402(g)
of the Code, employees with 15 or more years of service with the same employer
limited by the cap may be eligible to exceed the $15,000. This is called “catch up” provision. This provision allows eligible employees to
defer an additional $15,000 over a five-year period.
WHAT IS THE MINIMUM DEFERRAL AMOUNT?
The
vendors differ in what they require as a minimum amount.
MAY I CHANGE MY DEFERRAL AMOUNT?
Once
you decide to participate and agree to the amount to be deferred each pay period,
you may change the deferral amount during the (calendar) year.
CAN I STOP MY CONTRIBUTION AND RESUME
AT A LATER DATE?
YES. Elective contributions may be suspended at
any time; however, to resume your contribution a new Salary Reduction Agreement
must be completed. Your contributions
already on deposit will continue to participate in the appropriate fund(s)
based on allocations you have made. You
must contact your TSA provider and Human Resources any time you wish to change
allocations.
WHAT ARE MY INVESTMENT OPTIONS?
You
may direct your contributions into any one or combination of investment options
offered by your chosen vendor.
Investment options include both fixed accounts and variable accounts,
with a wide range of investment options.
Your vendor representative is available to discuss your options and to
provide additional information about allocating contributions, transferring
between funds, vendor charges and other questions you may have.
WHAT ARE SURRENDER CHARGES?
Your
vendor may impose surrender charges when a withdrawal is requested. This is an area where the vendors
differ. Participants should ask
pertinent questions of the vendor regarding all administrative fees including
transfer and surrender fees before enrolling.
CAN I BORROW FROM MY ACCOUNT?
You
may borrow from your TSA account under certain circumstances without having to
pay income tax or IRC penalties. The
loan must be paid back according to the loan schedule arranged by your vendor. Your vendor representative can provide
further information.
HOW WILL I KNOW HOW MUCH IS IN MY TSA
ACCOUNT?
Your
vendor will provide you with Quarterly Account statements that will show:
·
Account
summary showing all transactions including deposits and withdrawals
·
Interest
accrued (interest is deferred from taxes as well)
·
Applicable
expense charges
·
Current
interest rates
·
Variable
units purchased and the applicable unit value
AM I RESTRICTED IN ACCESSING MY TSA
ACCOUNT?
Yes.
Monies deferred to a TSA account are intended for retirement income. Therefore, the availability of these funds
prior to retirement is restricted.
Federal legislation in the Tax Reform Act of 1986 restricts withdrawals
of monies deferred after January 1989 unless one of the following events
occurs:
·
Reached
age 59 -1/2
·
Separation
from service
·
Death/Disability
·
Financial
disability hardship
·
Qualified
domestic relation orders (QDRO)
WHAT HAPPENS IF I TERMINATE
EMPLOYMENT?
·
You
may withdraw your cash, subject to IRS regulations.
·
You
may leave the money to accumulate for future use.
·
You
may transfer your account balance if your new employer has a tax-deferred
annuity plan and the new plan accepts transfers.
·
You
may roll your money over to an IRA rollover account following IRS guidelines.
WHAT ARE MY OPTIONS AT RETIREMENT?
·
You
may choose to leave your money in your account and your funds will continue to
participate in the investment earnings on a tax-deferred basis until you elect
to withdraw them. Generally, at age 70-1/2, IRS requires that you begin to
withdraw a portion of the balance
·
You
may annualize your account balance to provide periodic or annual income under a
variety of options.
·
You
may roll over your account balance to an IRA.
·
You
may choose to receive lump-sum payouts of the money in your account.
WHAT HAPPENS TO MY TSA IF I SHOULD DIE
PRIOR TO RETIRMENT?
Your
account balance (valuation as of the date of distribution) is paid to your
beneficiary based on IRS distribution regulations.
HOW DO I ENROLL IN THE TSA PLAN?
The
enrollment process starts with contracting one or more vendors from the State
list of authorized vendors, which can be obtained from the college’s Human
Resource Office.
Once you have determined the amount you elect to defer, the figure is entered on a Salary Reduction Agreement Form furnished by the vendor and/or Human
Resources. This form becomes the payroll deduction authorization. The amount of the annual reduction amount is divided by the number of times paid in the calendar year to determine each pay-period amount (Individual-specific pay periods for wage and adjunct faculty, 18 for 9-month faculty, and 24 for 12-month faculty and classified). TSA deductions are not taken from summer payrolls on 9-month faculty.
Following the employee’s pay date, the money is sent to Fringe Benefits Management Company (FBMC), who sends the money to the TSA vendor. The monies are allocated according to the investment options selected by you and listed on the form you completed with your chosen vendor. Allocations can be changed at any time using the instructions provided you from the vendor.
CAN ADJUNCT FACULTY PARTICIPATE?
VWCC offers participation in this benefit program to adjunct faculty. However, because of the many variables of adjunct pay, we require that a Salary Reduction Agreement be completed each semester. Adjunct faculty may defer 100% of their gross earnings up to $15,500 ($20,500 if over age 50) per calendar year.
If you have 403(b) deferrals with two employers, you will need to provide that data to your chosen vendor. The 402(g) limit is employee specific and includes tax-deferred income from ALL EMPLOYERS.
Internal Controls
Salary
Reduction agreements are initiated by the employee with the vendor and retained
in the employee’s personnel file.
If
an employee is found to be over-deferring, immediate action will be taken to
correct the situation.
The Human Resource Office will periodically monitor tax-sheltered annuity deductions, and require employees to immediately adjust contributions, if necessary, to ensure compliance with maximum contribution limits.
Employee Responsibility
Employees
are responsible for sheltering no more than that allowed by the IRC. Employees shall be responsible for all excess
tax implications and IRS penalties for income sheltered beyond that permitted
by the IRC for any taxable year.
Employees are responsible for providing the TSA vendor all pertinent
information regarding earnings information, previous tax-sheltered income, and
qualified retirement plans.
7/07
SPECIAL NOTICE TO COMPANIES MARKETING
TAX-SHELTERED ANNUITIES (403b)
PAPERWORK REQUIREMENTS:
1. A Salary Reduction Agreement (attached) must be completed by every employee upon making application for participation in a 403(b) plan. A Salary Reduction Agreement must also be completed at the time of any change in the salary reduction amount.
2. Vendor may send the Salary Reduction Agreement to FBMC at the address below or send the forms to VWCC Human Resources for forwarding to FBMC. Forms must be received by FMBC and/or Human Resources before payroll deductions are implemented.
3. Fringe Benefit Management Company (FBMC)
ATTN: Sherrye McCullough
P. O. Box 1800
Tallahassee, FL 32301
Toll Free: 800-872-0345 X2256
FAX: 850-514-5803
4. FBMC notifies the VWCC Human Resource Office that a Salary Reduction Agreement has been authorized.
5. VWCC Human Resource Office sets up the TSA deduction to begin on the next payroll.
Payroll deductions for a tax-sheltered annuity will not begin until the College Human Resource Office has received authorization from FBMC.
It is the responsibility of the vendor, based upon information the employee provides to the vendor, to ensure that the employee does not exceed IRS contribution guidelines.
7/06
Salary Reduction Agreement
See link below for form:
PROCEDURES FOR TAX SHELTERED ANNUITIES – 403(B) PLANS
PURPOSE: To establish administrative procedures for
ensuring compliance with Internal Revenue Code, Section 403(b), Tax Sheltered
Annuities
NOTIFICATION TO EMPLOYEES:
1.
Information
regarding the availability of participation in a 403(b) tax sheltered annuity
plan and a definition of who is eligible to participate will be published
periodically in the college’s newsletter that is distributed to all VWCC
employees. Upon request, employees will
receive a copy of the VWCC Annuity Program Guidelines (see attached).
2.
The
guidelines will be incorporated into the Classified Staff Handbook, and the
Faculty Handbook, and discussed in the orientation process. Guidelines will also be included in the
Adjunct Faculty Handbook.
3.
Part-time employees and adjunct faculty will be given the
guidelines as part of their new employee packet.
PAPERWORK REQUIREMENTS:
1.
A Salary Reduction Agreement
(attached) must be completed by every employee upon making application for
participation in a 403(b) plan. A Salary
Reduction Agreement must also be completed at the time of any change in the
salary reduction amount.
2.
Vendor may send the Salary Reduction
Agreement directly to FBMC at the address listed below or send it directly to
the VWCC Human Resources Office for forwarding to FBMC. Forms must be received by FBMC before payroll
deductions are implemented.
Fringe
Benefit Management Company (FBMC)
ATTN: Sherrye
McCullough
Toll Free: 800-872-0345 X2256
3.
FBMC notifies the VWCC Human Resource Office that a Salary Reduction
Agreement has been authorized.
4.
The VWCC Human Resource Office sets up the TSA deduction to begin on the
next available payroll.
MONITORING of 403(b) CONTRIBUTIONS:
The
college will perform the following internal review process.
1.
The Human Resources Office reviews all
Salary Reduction Agreements. Any
questionable or excessive amounts will be verified and discussed with the
employee and/or vendor. Amounts will not
be processed on the payroll until corrections are made to the salary reduction
agreement.
2.
The payroll office will provide Human
Resources a copy of Report 857 (CIPPS Annuity Excess Deduction Report)
quarterly for all 403(b) participants.
Any contributions identified as possibly excessive are reviewed with the
employee and appropriate action taken to insure compliance with 403(b)
guidelines.
EMPLOYEE
RESPONSIBILITY:
Employees are responsible for sheltering no more than that allowed by the Internal Revenue Code (IRC). Employees shall be responsible for all excess tax implications and IRS penalties for income sheltered beyond that permitted by the IRC for any taxable year. Employees are responsible for providing the TSA carrier all pertinent information regarding earnings information, previous tax-sheltered income, and qualified retirement plans.
07/07