Frequently Asked Questions
What is a Tax-Sheltered Annuity (TSA) 403(b) Plan?
A 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 school are eligible to tax defer income under this plan as a pre-tax payroll deduction.
Why is it Called Tax-Deferred?
Your voluntary pre-tax contributions to a TSA will reduce your taxable income for both state and federal taxes. Contributions to a TSA 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 amount and any interest accrued is postponed until the money is distributed. A pre-tax contribution or TSA plan should not be confused with tax exempt or a post-tax Roth Plan.
Who is Eligible to Participate in a TSA Plan?
IRC non-discrimination rules state that an employer offering a tax-sheltered annuity plan to a group of employees must offer this plan to all employees with some exceptions. Virginia Western Community College (VWCC) offers participation to all employees, except for those under the Federal work-study program, student workers, tutors, and non-student workers. Full-time employees are eligible to participate in addition to adjunct employees and traditional hourly/wage employees.
What are the Advantages of a TSA Plan?
Participation in a TSA plan will reduce your taxes immediately. Every dollar you defer to your TSA is not subject to ordinary income tax withholding, as a result, you will generally pay less federal and state income tax. The tax advantage 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 plan is eligible for an employer cash match (401a). Generally, the cash match amount has been up to $480 per calendar year and has been known to be reduced or eliminated. The cash match plan may be discontinued or changed as identified in the Central Appropriations Act of Virginia.
Highlights of the TSA Plan
- Contributions from your salary are made on a pre-tax basis and accumulate on a tax-deferred basis.
- Loan provisions enable you to borrow against your account balance.
- You have a wide choice of investment options.
Power of Tax Deferral
| 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.
What are the Disadvantages of a TSA Plan?
Monies deferred to a TSA plan are intended as additional retirement income. Generally, access to the funds is restricted prior to retirement. In addition, if conditions for early withdrawal are met, there may be a significant tax penalty.
Can I Participate in Both a TSA (430b) and Deferred Compensation (457b) Plan?
- Participating in a TSA does not prevent your ability to also participate in the Deferred Compensation Plan, or 457b.
- Eligible employees will only receive one employer cash match designated in totality to either the 403b or 457b. The cash match may not be split between two separate plans.
- You may max out your contribution limit in both the 403b and 457b plans.
Can I Participate in Both a Pre-Tax TSA Plan and a Post-Tax Roth Plan?
- You may participate in both a pre-tax and post-tax Roth Plan, a pre-tax only or a post-tax only.
- You may not exceed the maximum annual contribution when combining contributions in both a pre-tax and post-tax within the same plan.
- Information on the Roth Plan is available through a vendor financial advisor or by contacting the Human Resources Office.
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) contributions. 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 contribution.
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. Under section 402(g) of the Code, employees with 15 or more years of service with the same employer limited by the cap may participate in a “catch up” provision. This provision allows eligible employees to defer an additional money over a five-year period. Persons under 50 and 50 or older have different maximum annual contribution limits. Maximum contribution limits may be found on the annual Universal Notice or by contacting your Human Resources team.
What is the Minimum Deferral Amount?
Contact Human Resources to determine the minimum deferral amount, and the deferral amount necessary to receive the full employer cash match.
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 at any time by completing a new Salary Reduction Agreement Form. The effective date of the change is driven by our third-party administrator cut-off dates.
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. You must contact your TSA provider any time you wish to change how your money is being invested, e.g., investment allocations.
What is My Investment Allocation 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 allocation options. Your vendor financial representative is available to discuss your allocation options and to provide additional information about contributions, transferring between funds, vendor fees, hidden fees, and other questions you may have.
What Are My Vendor Options?
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.
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, surrender fees, hidden fees, and penalties 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 Balance?
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
- Many vendors have on-line account availability through their secure website
Am I restricted in Accessing my TSA Account Balances?
Yes. 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 (you may be an active employee)
- Separation from service
- Total disability or death
- Unforeseen financial hardship
- And other events as established by regulations
A 10% Federal tax penalty may apply to withdrawals made prior to reaching age 59 1/2.
Am I Restricted in Accessing my Cash Match Account Balances?
YES. Unless you are age 72 (subject to change) or older, you must be a separated employee with a bona fide break in service. No exceptions unless you meet the minimum distribution age requirement.
What Happens if I Terminate Employment?
- You may withdraw your cash, subject to IRS regulations and associated penalties.
- You may retain the plan. You may manage the plan by changing allocations; however, you will not be permitted to make contributions.
- You may transfer your account balance to a qualified plan.
- You may roll your money over to an IRA rollover account following IRS guidelines.
- If you have a leave payout, or your contract is being paid up, you may make a one-time contribution to your 403b. The one-time contribution in addition to your current deferrals may not exceed the maximum annual contribution rate.
What Are My Options at Retirement?
- You may retain the plan. You may manage the plan by changing allocations; however, you will not be permitted to make contributions.
- At age 72 (subject to change), IRS requires that you begin to withdraw a portion of the balance. The IRS may change the minimum distribution age.
- You may annualize your account balance to provide periodic or annual income under a variety of options or request a lump-sum payout.
- You may roll over your account balance to a qualified plan.
- If you have a leave payout, or your contract is being paid up, you may make a one-time contribution to your 403b. The one-time contribution in addition to your current deferrals may not exceed the maximum annual contribution rate.
What Happens to my TSA if I Should Die?
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?
Vendor contact information can be obtained from the college’s Human Resource Office. You must enroll in the plan through you chosen vendor before contributions from your paycheck may be taken. Once you have determined the amount you elect to defer, the figure is entered on a Salary Reduction Agreement (SRA) Form furnished by the vendor, Human Resources, or obtained on VW Connect. The SRA becomes the payroll deduction authorization. The amount of the annual reduction amount is divided by the number of times you are paid in the calendar year and must be recorded in whole dollars. TSA deductions are not taken for 9-month faculty on summer contracts.
Following the employee’s pay date, generally it will take up to 2 weeks from the time your deduction is taken from your check until the time the vendor receives the funds for investment.
Can Adjunct Faculty Participate?
VWCC offers participation in this benefit plan to adjunct faculty. However, an adjunct will need to complete a new Salary Reduction Agreement (SRA) if deductions cease because of a lack of a paycheck, such as a semester of work being missed. Provided you are continuously receiving a paycheck from VWCC, a new SRA will not need to be completed each semester. Adjunct faculty may defer 100% of their gross earnings up to the maximum annual contribution limit as established by the IRS.
What if I have Multiple Deferrals with Different Employers?
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 contributions taken from ALL EMPLOYERS.
Internal Controls
Salary Reduction and Cash Match Agreements (if applicable), are initiated by the vendor and employee. Forms are retained in the employee’s personnel file.
If you are over-deferring, immediate action must be taken to correct the situation.
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, other deferrals, and qualified retirement plans.
Procedures for Tax Sheltered Annuities – 403(b) Plans
Purpose
Establish administrative procedures for ensuring compliance with Internal Revenue Code, Section 403(b), Tax Sheltered Annuities.
Notification to Employees
- 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 at the beginning of a new calendar year on the college’s bulletin, entitled, “Universal Notice”.
- Upon request, employees will receive a copy of the VWCC Plan Document.
- Information will be incorporated into the Classified Staff Handbook, the Faculty Handbook, and discussed during full-time employee orientation.
Paperwork Requirements
- A Salary Reduction Agreement (SRA) must be completed by every employee after enrolling in a 403(b) plan. A Salary Reduction Agreement must also be completed at the time of any change in the salary reduction amount, to stop the salary reduction, or after changing a vendor. Upon changing a vendor, two SRA forms will need to be completed. One, to discontinue contributions to the old provider and the second to begin contributions with the new provider. Full time faculty and classified employees initially enrolling must also complete a Cash Match Agreement form.
- The vendor or employee must send the Salary Reduction Agreement and the Cash Match Agreement, if applicable, to VWCC Human Resources for forwarding to the third-party administrator and the college’s payroll personnel. Forms must be received by the third-party provider and Human Resources before payroll deductions are implemented.
- The third-party administrator sets up the TSA deduction to begin on the next payroll permitted according to their schedule of changes.
Payroll deductions for a tax-sheltered annuity will not begin until the college’s payroll personnel has received authorization from the third-party administrator.
Monitoring of 403(b) Contributions
The college will perform the following internal review process:
- The Human Resources Office and payroll personnel 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.
- Payroll personnel will review 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 ensure 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 vendor all pertinent information regarding earnings information, previous tax-sheltered income, other deferrals, and qualified retirement plans.
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