Employees of the College may voluntarily elect to participate in the College's TSA Program as authorized under section 403(b) of the IRC. A tax sheltered or deferred annuity allows an employee to postpone receiving a portion of salary until retirement. The amount of salary deferred, and any investment earnings on it, will not be considered income for federal tax purposes until its value is paid or otherwise made available.
An employee may chose an investment carrier from the TSA vendor list (included at the end of this chapter) to determine how much income is to be invested. That amount will be deducted via a salary reduction. No federal income taxes are withheld from that money and the funds are remitted to the chosen investment carrier. Any earnings on the money are not taxed until an employee withdraws money from the account.
How Much Can An Employee Contribute?
The maximum contribution limit to a 403(b) TSA is set by the Internal Revenue Service and may change from year to year. For current information, consult a carrier representative or a tax advisor.
An employee directs the investment of the money in his/her TSA account. There are two types of investment vehicles authorized under section 403(b) of the IRC. One is a 403(b)(1) account which is an insurance company. The other is a 403(b)(7) Mutual Fund Company. Each option has different investment objectives, produces a different rate of return and carries a different amount of risk. The College is not responsible for any losses or gains due to investment fluctuations. Each employee is responsible for monitoring the financial stability of each company and product with whom investments are made.
Authorized agents who are able to provide more information on these investments may be found on the Human Resources Department web-site at: http://www.epcc.edu/HumanResources
Changing or Stopping Contributions
The monthly contribution can be increased or decreased as desired by an employee. Also, payments may now be begun or stopped at any time during the year. Changes must be made in advance of the payroll cycle.
Receiving the Money
Because the tax breaks allowed under Section 403(b) of the IRC are designed to encourage people to save for retirement, the IRS restricts withdrawals from these accounts before age 59 ½. While an employee is still employed the only way to access an employee’s money before age 59 ½ is through a plan loan (not available with all carriers or 403(b)7 accounts) or hardship withdrawal.
Remember, whenever money is saved on a before-tax basis, taxes are deferred, not avoided entirely. Taxes on TSA withdrawals are generally due the same year that the funds are distributed from an employee’s account.
Tax Penalty on Early Distributions
Since tax breaks are designed to encourage people to save for retirement, the IRS charges a 10% early withdrawal penalty tax on money received before age 59 ½. The tax penalty is added to any applicable surrender charges for market value adjustment.
If employment is terminated or if an employee elects early distribution of the tax deferred savings, an employee should check with a professional tax advisor before making withdrawal decisions. An employee can chose any form of distribution the vendor offers.