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Tax Shelter Annuity Plans

WHAT IS A TAX-SHELTERED ANNUITY (TSA) 403(b) PLAN?
TSA, Tax-Sheltered Annuity, is the 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.

WHY IS IT CALLED TAX SHELTERED?
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 The liability for taxes on the sheltered or deferred amount and any interest accrued is postponed until the money is withdrawn as income, usually at retirement time. Do not confuse tax sheltered or deferred with tax exempt.

WHO IS ELIGIBLE TO PARTICIPATE IN THE 403(b) PLAN?
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. NRCC offers participation to all employees, with the exceptions of work-study students, student employees and part-time wage (P-14) employees who normally work fewer than 20 hours per week. Adjunct faculty are eligible to participate.

WHAT ARE THE ADVANTAGES OF A TSA PLANS?
Participation in a TSA plan will reduce your taxes immediately. Every dollar you contribute to your TSA is not currently subject to ordinary income tax. So, by participating in the plan you will generally pay less federal and state income tax. The example shown in the table following assumes a single employee with one withholding exemption.

POWER OF TAX DEFERRAL
(Single)

WITHOUT TSA WITH TSA
Gross Semi-Monthly Income $1,500.00 $1,500.00
Pre-Tax Contribution None $ 150.00 TSA
FIT (Federal Income Tax) $191.94 $ 169.44
Combined OASDI & HI
(FICA) $114.75 $ 114.75
SIT (State Income Tax) $67.61 $ 58.99
TAKE HOME PAY $1,125.70 $1,006.82

RESULT:You contributed $150.00 but your take-home pay is only reduced by $118.88 because of lower taxes for FIT and SIT.

HIGHLIGHTS OF THE PLANS
Contributions from your salary are made on a pre-tax basis and accumulate on a tax-deferral 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 appropriately as 403(b) money.

NOTE: You have had the benefit of lower taxes up front all year long because for each time the taxes were computed on the salary rate minus the amount of the TSA.

HOW MUCH CAN I CONTRIBUTE 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) & 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 of deferrals. Generally, you may contribute, in most circumstances*, as much as 20% of your current salary, up to a maximum of $10,000 per calendar year, on a before tax basis. Your maximum contribution amount is determined by an IRC formula based on data you provide the carrier. The results of the calculation are referred to as your maximum exclusion allowance (MEA). This calculation is to be done every year, or as changes are made, as the variables in the formula change.

Under section 402(g) of the IRC, employees with 15 years of service with the same employer, limited by the cap, may be eligible to exceed the $10,000 limit if the formula permits.

*New employees are not able to defer at the 20% figure.

WHAT IS THE MINIMUM DEFERRAL AMOUNT?
The College requires a minimum deferral of $10.00 per pay period. The carriers may differ in what they require as a minimum deferral 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. The state payroll system does not accommodate percents so any deferral amount must be stated in dollars.

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 and maximum exclusion allowance (MEA) must be completed. Your contributions already on deposit will continue to participate in the appropriate fund(s) experience based on allocations you have made. Allocations can be changed anytime by contacting your TSA plan carrier.

WHAT ARE MY INVESTMENT OPTIONS?
You may direct your contributions into any one or combination of the investment options offered by your chosen carrier. Investment options include both fixed accounts and variable accounts, with a wide range of investment options. Your carrier representative is available to discuss your options and to provide additional information about allocating contributions, transferring between funds, carrier charges and other questions you may have. Don?t overlook the importance of asking specific questions regarding fees, surrender charges, and other costs to you. There are no dumb questions!

WHAT ARE SURRENDER CHARGES?
Your carrier may impose surrender charges when a withdrawal is requested. This is an area where the carriers differ. Participants should ask pertinent questions of the carrier regarding all administrative fees including transfer and surrender fees before enrolling.

CAN I BORROW FROM MY ACCOUNT?
You may borrow money 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 carrier. Your carrier representative can provide further information.

HOW WILL I KNOW HOW MUCH IS IN MY TSA ACCOUNT?
Your carrier will provide you with Quarterly Account statements which will show:

All transactions including deposits and withdrawals
Account summary
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 contributed to a TSA account are intended for additional 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 contributed after January 1989 unless one of the following events occur:

over age 59 1/2?
separation from service
death
disability
financial disability hardship
qualified domestic relation orders (QDRO)

Withdrawals of pre-1989 contributions remain subject to provisions of law in effect before January 1989, with possible carrier limitation and/or surrender charges. Monies withdrawn maybe subject to a 10% IRC penalty unless certain conditions are met. These conditions are:

Attainment of age 59 1/2
Death
Disability
Participant receives substantially equal periodic payments for life after separation from service
Attainment of age 55 (or more) when separating from service
Qualified domestic relation orders
Deductible medical expenses
WHAT HAPPENS IF I TERMINATE EMPLOYMENT?
You may withdraw your cash, subject to IRC 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.
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 ?, IRC requires that you begin to withdraw a portion of the balance.
You may annuitize your account balance to provide periodic or annual income under a variety of options.
You may roll over your account balance to an IRA.
WHAT HAPPENS TO MY TSA IF I SHOULD DIE BEFORE I RETIRE?
Your account balance (valuation as the date of distribution) is paid to your beneficiary.

HOW DO I ENROLL IN THE TSA PLAN?
The enrollment process starts with contacting one or more carriers from the State list of qualified carriers which can be obtained from the college Payroll and Personnel Office. The carrier representative will calculate for you a Maximum Exclusion Allowance (MEA) using the IRC formula. A MEA tells you the maximum deferral available to you for the current taxable year. You must furnish the carrier the data for the formula. The accuracy of the MEA calculation is dependent on your submitting complete and accurate data.

Data you must furnish the carrier includes: salary, years of service, (partial years of service as adjunct, wage or part-time salaried must be equated to that of a full-time employee), 457 governmental deferred compensation amounts, prior contributions made at NRCC to other carriers, annual amount of pretaxed benefits, e.g., premium conversion/flexible spending accounts, breaks in service and educational or sabbatical leave at 50% pay.

Once you have been told the maximum amount you are eligible to defer, you must then determine the amount you wish to defer. This figure is placed on a Salary Reduction Agreement furnished by New River Community College Personnel Office. This form becomes the payroll authorization. You must sign this form and indicate whether you have chosen an alternative limit to maximize your contribution. If you do not know, ask your carrier! It is important for your future use. The amount of the annual contribution or deferral amount is divided by the number of times paid to determine each pay period?s amount (18 or 24 for 9-month faculty, 24 for 12-month faculty and classified, individual specific for wage and adjunct faculty). TSA contributions or deferrals are not taken from summer payrolls although all wages from NRCC may be used in the formula data. The Salary Reduction Agreement along with a Maximum Exclusion Allowance (MEA) form must be supplied to the Personnel Office before deductions may begin.

The monies are sent to the carriers by Employer Resources following the employee?s pay date. The monies are allocated according to the investment options selected and listed on the form you completed with your chosen carrier. Allocations can be changed at any time using the instructions provided you from the carrier.

Last Modified: March 4, 1998