| Foothill-De
Anza Community College District
Payroll Services
Frequently asked questions regarding Tax Sheltered Annuity (403b) plans.
What is a Tax Sheltered Annuity (TSA) plan?
A tax-sheltered annuity plan is often referred to as a "403(b) plan." Under
Section 403(b) of the Internal Revenue Code, employees of non-profit
institutions and public schools can set aside money for retirement
on a pre-tax basis through a plan offered by their employer. To
encourage saving for retirement through these plans, the federal
government created special tax advantages for 403 (b) contributions.
How does a 403(b) plan work?
Under the guidelines of the IRS Publication 571, you decide the amount
of money you want to contribute to the plan during each pay period,
up to a pre-determined maximum amount (the IRS sets an annual dollar
limits). The IRS has approved the use of three general types
of investment vehicles for TSA contributions. They include
Annuities issued by insurance companies, Mutual Funds, Variable
Annuities and Life Insurance. A combination of one or more
of the products may be used depending upon your financial objectives.
Your 403(b) contribution is deducted from your pay before income taxes
are taken out. You may submit multiple salary reduction agreements
during the year that are consider reasonable. You don't owe
income taxes on your contributions, or any earnings on those contributions,
until you withdraw from the plan.
Who may establish a 403(b) plan?
Any contract employee of the Foothill-De Anza College District is eligible
to participate in the plan through a payroll deduction.
How to get a payroll deduction form?
A payroll deduction form, referred to as a Salary Reduction Agreement,
can be acquired through three different sources:
What is the Maximum Exclusion Allowance (MEA)?
The Maximum Exclusion Allowance, or MEA, is a calculation based on
your compensation, years of service, and your previous contributions
to your current retirement plan. For employees who have worked
for the District for over 15 years, there are special catch-up
provisions, which allow employees to make higher contributions
than the normal yearly limits to make up for previous years in
which they contributed less than they were permitted. For
the year 2007, the maximum general limit is $15,500. For employees who will
have reached age 50 by the end of the year can contribute an additional
amount of $5,000 per year.
Please be advised that a TSA is your own personal business and the District
will not provide advice on your investment elections, nor will
the District assist you in performing your MEA calculation. Moreover,
the District will not endorse any TSA vendor; however, our District
has set up a minimum participation level of 25 employees per plan.
A List of qualified vendors is provided. For more detail
information, please consult with your financial advisor or IRS
Publication 571 - Tax Sheltered Annuity Programs for Employees
of Public Schools and Certain Tax Exempt Organizations.
What is the 403b withdrawal regulation?
Once you withdraw funds from your retirement plan, your distribution
is subject to ordinary income taxes. If you have a 403(b)
account and you withdraw money from your account before you reach
age 59 1/2, there may be a 10% early-withdrawal penalty payable
to the IRS on any pre-tax amount withdrawn. In addition,
your distribution will be subject to mandatory 20% federal income
tax withholding unless the entire withdrawal is rolled over directly
to another qualified retirement plan or IRA.
Are there exceptions to the distribution penalty?
According to the IRS, a 10% premature withdrawal penalty can be waived if employee:
- Reaches age 59 1/2,
- Separates from service,
- Dies,
- Becomes disabled, or
- In the case of salary reduction contributions, encounters financial hardship.
How to get more information?
- IRS Publication 571 - Tax Sheltered Annuity Programs for Employees of PublicSchools and Certain Tax Exempt Organizations
- IRS Publication 575 - Pension and Annuity Income,
- IRS Publication 590 - Individual Retirement Arrangements (IRAs)
- IRS Publication 910 - Guide to Free Tax Services,
These publications are available from the IRS upon request. It contains free tax information, IRA, Pension and Annuity related topics. You may access the IRS Web page on the Internet at www.irs.gov; contact (800) 829-3676 ordering forms, and publications; or call (800) 829-4477 to listen to pre-recorded messages covering various topics. For any further questions, please call the District Payroll Services at (650) 949-6263. |
