Penn State Intercom......October 11 , 2001

2001 legislative changes
significantly affect
retirement plans

Among the many tax law changes in the Economic Growth and Tax Relief Reconciliation Act of 2001, Congress included reforms that can significantly increase the amount of money that individuals may contribute to tax-deferred retirement programs. These reforms affect Tax Deferred Annuity contributions made through payroll deduction and also extend to private retirement accounts such as Individual Retirement Accounts (IRAs). The following are some of the most significant changes that are relevant to faculty and staff:

* Maximum Exclusion Allowance: Current Internal Revenue Service (IRS) regulations limit the percentage of gross income that an individual can tax-defer annually. These percentages have varied from year to year and are affected by your retirement plan choice. Effective Jan. 1, this percentage limitation is repealed. For many faculty and staff this means the opportunity to contribute more to a TDA.

* Limit on Elective Deferrals: In addition to the percentage maximum, current IRS regulations impose an annual dollar maximum on tax-deferred contributions, currently $10,500. While a maximum dollar limit continues, that amount will increase to $11,000 in 2002 and is scheduled to increase by $1,000 each year through 2006.

* Catch-up Provisions: Effective Jan. 1, participants age 50 and older may make elective deferrals above the statutory limits as outlined above. These employees will be able to contribute an additional $1,000 in 2002, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005 and $5,000 in 2006. Additionally, faculty and staff with at least 15 years of service may be eligible to contribute up to an additional $3,000 per year.

* Portability: The ability to roll over funds from one retirement plan to another has been restricted by IRS regulations. University employees who have retirement funds in a previous employer's 401(k) plan have been prohibited by IRS regulations from rolling those funds into the University's 403(b) plan with TIAA-CREF. Instead they were required to roll over the money to an IRA. Effective Jan. 1, the rollover of distributions between qualified retirement plans will be allowed. Similarly, individuals may roll over IRAs into a TIAA-CREF retirement plan.

* IRA Contribution Limits: The current $2,000 maximum IRA contribution will increase to $3,000 for calendar years 2002 through 2004; $4,000 for 2005 through 2007; and $5,000 in 2008. The new regulations also provide for catch-up provisions for participants age 50 and over. Eligibility for tax-deductible IRA participation will continue to be determined by adjusted gross income. Specific information regarding IRAs is available in IRS publication 590.

* Educational IRA Limits: The $500 annual limit for contributions to an educational IRA increases to $2,000.

* Maximum Compensation Limits: An employee's current retirement plan contribution, as well as the University's, is limited to a percentage of the first $170,000 of annual earnings. That limit will increase to $200,000 in 2002.

* Contribution Limits to TIAA-CREF retirement: As a defined contribution plan, annual contributions by both employer and employee cannot exceed 25 percent of salary or $35,000. That dollar maximum increases to $40,000 in 2002.

* Tax Credit for Low and Middle-Income Savers: Starting in 2002, taxpayers with income of $25,000 or less ($50,000 for joint filers) will be eligible for a tax-credit for contributions to tax-deferred retirement plans such as TDAs or IRAs. The amount and percentage of the credit will be determined by adjusted gross income and filing status. For example, individuals with an adjusted gross income of $15,000 or less can receive a tax credit equal to 50 percent of the amount of his or her IRA contribution.

The above information is designed as an overview of the upcoming changes. Specifics regarding individual investment strategy and/or options can be addressed by a TDA company. Representatives from each of the five companies authorized to provide TDAs at the University will be available at the Benefits Open Houses on Nov. 13 and 20.

At any time during the year employees may enroll in a TDA and also may change the amount that is deducted from the employee's pay. If an employee wishes to change the amount of the contribution, he or she will need to complete a new Voluntary Salary Reduction Agreement, indicating the new deduction amount or percentage. These forms are available for download from the Employee Benefits Division Web site at http://www.ohr.psu.edu/benefits/vsra.htm.

If an employee currently is making the maximum tax-deferred deduction but wishes to take advantage of the higher contribution amount available in 2002, he or she must complete a new salary reduction agreement. The dollar amount or percentage of pay that is being contributed to a TDA will be included on the statement of current benefits that each employee will receive this month. Also available online is the Tax Deferred Annuity Summary, which provides general TDA information as well as specifics about each of the five companies providing TDAs to faculty and staff.

General questions regarding TDAs should be directed to the Employee Benefits Division at bene@psu.edu or by phone at (814) 865-1473.

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