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February 15, 2009

Tax sheltered annuity (TSA)

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Definition

Also referred to as a 403b annuity, a Tax Sheltered Annuity (TSA), is a retirement plan established by a nonprofit- tax-exempt organization as described under IRC § 501(c)(3) , public school systems including those organized by Indian tribal governments, cooperative hospital service organizations, Uniformed Services University of the Health Sciences (USUHS) for their employees, and certain ministers.

Under a 403(b) plan, eligible employees may defer a portion of their wages/salary to their account under the plan. These deferred amounts are referred to as Salary-Deferral Contributions, and can be made on a pre-tax and/or post-tax basis.

Contributions under a 403(b) can be invested in :

  • An annuity contract as described under IRC § 403(b)(1),
  • A custodial account as described under IRC § 403(b)(7) , where investments are limited to regulated investment companies described in IRC §851(a)(1)(A) :or
  • A retirement income account as described under IRC § 403(b)(9), for which there is usually no restriction on investments

Earnings in a 403(b) account grow on a tax-deferred basis and distributions are treated as ordinary income

Individuals may defer up to 100% of their compensation up to the dollar limit that is in effect for the year to the plan. Individuals who reach age 50 by the end of the year may defer additional amounts referred to as ‘Catch-up’ contributions.

The dollar limits can be viewed here

These are the limits established under federal law. However, an employer may elect to reduce the percentage of salary that an employee may defer to its 403(b) plan. For instance, the plan may be designed to limit Salary Deferrals to 10% of compensation. In such a case, if the individual’s compensation for the year is $70,000, the maximum amount he/she can contribute as salary deferral contributions for the year is $7,000 ($70,000 x 10%).

403(b)s are subject to other rules that may allow contributions in excess of these amounts. For example, the 15-year rule.

Employers may choose to make matching contributions to the accounts of employees who make salary deferral contributions.

Referring Cite

IRC § 403(b),IRS Publication 571

Additional Helpful Information

  • IRS List of Resources on 403(b) Plans
  • Final 403(b) Regulations
  • IRS Newsletter on 403(b) Plan Regulations
  • ICI Letter to Treasury Re: Final Regulations Under Code Section 403(b) (Investment Company Institute)
  • Rev. Proc. 2007-71: Model 403(b) Plan Documents and Plan Amendments for Public School Sponsors This revenue procedure provides model plan language that may be used by public schools either to adopt a written plan to reflect the requirements of § 403(b) and the regulations thereunder or to amend its § 403(b) plan to reflect the requirements of § 403(b) and the regulations thereunder. This revenue procedure also provides rules for when plan amendments or a written plan are required to be adopted by public schools or other eligible employers to comply with the recently published final regulations under § 403(b) (72 FR 41128; TD 9340). This revenue procedure also provides guidance relating to the application of § 403(b) to certain contracts issued before 2009.
  • Notice 2009-3: Extends the deadline by which a 403(b) plan sponsor needs to have a written §403(b) plan in place. The deadline has been extended from January 1, 2009 to December 31, 2009, providing the plan sponsor satisfied certain requirements.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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