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 Federal work-study program, student workers, tutors, and non-student workers. Adjunct faculty are eligible to participate in addition to traditional hourly/wage employees.
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. In addition, full time faculty and full time classified employees that participates in the TSA program is eligible for an employer cash match (401a) up to $480.00 per year. Maximum cash matches may change in accordance with legislation.
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 In addition, even when conditions for early withdrawal are met, there is a significant tax liability for the monies withdrawn.
| 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.
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.
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 $17,000 per calendar year ($22,500 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 $17,000. This is called “catch up” provision. This provision allows eligible employees to defer an additional $3,000 over a five-year period.
The vendors differ in what they require as a minimum amount. Contact Human Resources to determine the minimum deferral amount to receive the full employer cash match.
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.
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 any time you wish to change allocations.
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.
You may choose from one of the four VWCC vendors that VWCC has a formal Plan Document and Information Sharing Agreement established: Ameriprise Financial, AXA Equitable, TIAA-CREF, and VALIC. You must contact Human Resources and complete a new Salary Reduction Agreement form to change vendors. Other community colleges may not have agreements with the same vendors; therefore, upon transferring to another community college you may need to change vendors and roll over your existing account to the new vendor.
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.
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.
Your vendor will provide you with Quarterly Account statements that will show:
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:
A 10% Federal tax penalty may apply to withdrawals made prior to reaching age 59 1/2.
Your account balance (valuation as of the date of distribution) is paid to your beneficiary based on IRS distribution regulations.
Contact information 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.
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 $17,000 ($22,500 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.
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 Payroll Office will periodically monitor tax-sheltered annuity deductions, and require employees to immediately adjust contributions, if necessary, to ensure compliance with maximum contribution limits.
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.
Establish administrative procedures for ensuring compliance with Internal Revenue Code, Section 403(b), Tax Sheltered Annuities.
Payroll deductions for a tax-sheltered annuity will not begin until the college’s Payroll Office has received authorization from FBMC.
The college will perform the following internal review process.
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.
For additional information and forms, see the Human Resources section of VW Connect.
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