Tax Sheltered Annuity

What Is A Tax Sheltered Annuity

A tax sheltered annuity sometimes called a 403(b) plan allows employees of certain non profit and public education institutions to make tax sheltered contributions from their income into a retirement plan. This type of plan also allows the employer to contribute to the employees retirement account. There usually is a maximum the employee can contribute to the plan however, sometimes there are provisions for a catch up plan which allows certain employees to make catch up contributions to make up for years where they didn’t make the maximum contribution.

Who Can Setup A Tax Sheltered Annuity Plan (403 (b) Plan) Eligible employees groups that can participate in the plan are:

• Employees of tax exempt organizations established under 502 (c)(3) of the Internal Revenue Code.

• Employees of the public school system that are actively involved in the day to day operations of a school.

• Employees of a corporative hospital service organization.
• Civilian and staff of the Uniformed Services University of the Health Sciences.
• Employees of public school systems organized Indian tribal governments.
• Certain Ministers:
  • Employed by a 501(3)(c) organization
  • Self Employed.
  • Ministers not employed by a 501(3)(c) organization, but they function as a minister in their day to day responsibilities of the employer, such as a hospital Chaplin.

  Universal Availability

  Universal availability means if an employer permits one employee to defer salary into a tax sheltered annuity or 403(b) plan, the employer must extend this opportunity to all employees of the organization. However, certain employees may be excluded from the plan:
• Employees who will contribute $200.00 or less annually.
• Those employees who participate in a 401(k) or 457 plan, or in another tax sheltered annuity or 403(b) plan.
• Non-resident Aliens.
• Employees who normally work less than 20 hours a week.
• Students performing services described in section 312(b)(10).

IRC 402(g) Limits

There is a limit of elective deferrals a plan participant may contribute to a 403(b) plan.

• Elective deferrals are limited to the lesser of $15,000 for 2006, $15,500 for 2007 or 100% of the participant’s includable compensation.
• Designated Roth contributions to a 403(b) plan count towards the $15,000 ($15,500 for 2007) 402(g) limit.
• Any catch up contributions to a 403(b) plan made are in addition to the 402(g) limit.
• The limit is subject to cost of living increases after 2007.

This 402(g) limit is a participant limit. If an employee participates in more than one 403(b) plan, all elective deferrals to all 403(b) accounts must be combined to determine the 402(g) limit ($15,000 for 2006) is exceeded.

If an employee participates in both a 403(b) plan and a 457 plan, up to $15,500 may be contributed to the 403(b) plan and another $15,500 to the 457 plan for 2007.

If an employee participates in both a 403(b) plan and a 401(k) plan, the deferrals to the 403(b) plan and the 401(k) plan must be combined to determine if the 402(g) limit for 2007 is exceeded

IRC 415(c) Limits

• A plan that includes both employer contributions and employee elective deferrals may not exceed the 402(g) limits and the total of all employee and employer elective deferrals may not exceed the limits of the 415(c).
• For the 2007 year, the total of employer and employee contributions including 15 year catch up contributions can not exceed the lesser of $45,000 or 100% of includible compensation, plus any age 50 catch up contributions.
• If an eligible employer also sponsors a 457 for it’s employees, contributions to the 457 are not limited under 415(c).

15-Years of Service Catch Up

To qualify for a 15 year catch up the employee must have 15 years of service with the same employer. If the employee has at least 15 years of service with the same employer in a public school system, hospital, home health service agency, health and welfare service agency, church or convention or association of churches, the limit on elective deferrals to his or her 403(b) account may be increased by up to $3,000 in a taxable year (lifetime employer by employer limit of $15,000).

A tax sheltered annuity is a type of annuity but there are many other types click here to learn about more.