Employee Benefits
Penn State Intercom......October 31, 2002

Changes in tax law allow
new choices for retirement savings

Benefits Open Enrollment begins Nov. 1

Starting Jan. 1, faculty and staff will have the ability to make larger contributions to tax-deferred employee retirement savings plans; have another plan option for more savings; and for those over age 50, have the ability to play "catch up" on their retirement savings.

Currently, University employees can make voluntary, tax-deferred contributions to a 403(b) Tax-Deferred Annuity (TDA). In 2003, faculty and staff also may contribute to a separate 457(b) Deferred Compensation Plan. As a result of recent tax law changes, employees may make a maximum annual contribution to both plans, rather than splitting the maximum contribution between them, as previously required by law. The new federal regulations allow employees to double the amount of tax-deferred retirement savings.

There are, however, differences between the plans. More details are available in the following Q&A from the Office of Human Resources.

Q. What do all of these plan numbers mean?

A. The plans are named for the Section of the IRS code that authorizes their use. While these plans have become increasingly similar regarding the maximum annual tax-deferral, they are not identical. The 403(b) plans, also known as Tax Deferred Annuities (TDAs), are limited to employees of nonprofit and educational institutions. Alternatively, 401(k) plans, which often are mentioned in financial news articles, are more commonly found in the corporate or "for profit" sector. Sometimes referred to as deferred compensation programs, 457 plans can be found in both the public and private sector.

Q. What are some of the differences between 403(b) and a 457(b) plans?

A. Some of the more significant differences are:

-- 403(b) plans allow the distribution of funds as a result of a qualified hardship, as defined by the IRS. 457(b) plans allow distribution only for "unforeseen emergencies." Purchasing a home or educational expenses for participants or family members would, by IRS definition, qualify for hardship withdrawals from a 403(b) plan. These situations generally would not meet the standard of distribution for unforeseen emergencies under 457(b).

-- Distributions from each plan are taxed as regular income in the year that they are received. If 403(b) funds are distributed before the participant reaches age 59 1/2, the IRS assesses an additional 10 percent tax penalty. No penalty applies to distributions from a 457(b) plan, regardless of the participant's age.

-- Participants in a supplemental 403(b) plan may begin to receive income from the plan while they're actively employed at Penn State. Distributions from a 457(b) plan may only begin after employment at the University has terminated.

-- Faculty and staff who have at least 15 years of service with Penn State may be eligible to make contributions to a 403(b) plan that are in addition to the maximum deferral and catch-up amounts. The "15 year rule" does not apply to 457(b) plans.

-- If a 457(b) plan participant is within three years of normal retirement, an enhanced limit may be available. This enhanced limit could allow tax-deferred contributions that are as much as twice the normal limit for that year.

Q. How much can I contribute to a 403(b) or a 457(b) plan?

A. The recent tax legislation significantly increased the maximum tax-deferred amount, eliminated complex calculations and provided for regularly scheduled increases in the annual maximums through 2006. Additionally, "catch-up" contributions were authorized for participants who are age 50 and older. These catch-up provisions also will increase through 2006.

Faculty and staff may participate in both a 403(b) Tax-Deferred Annuity Plan and a 457(b) Deferred Compensation Plan and make maximum contributions to each plan.

The following are the maximum tax-deferred contributions available for 403(b) Tax-Deferred Annuity Plans:

All participants may contribute up to $11,000 this year; $12,000 in 2003; $13,000 in 2004; $14,000 in 2005; and $15,000 in 2006. In addition, this year participants age 50 or older may contribute an additional $1,000, bringing their maximum contribution to $12,000. That additional amount increases to $2,000 in 2003; $3,000 in 2004; $4,000 in 2005; and $5,000 in 2006, bringing the maximum contribution to a 403(b) for participants age 50 or older to $14,000 in 2003; $16,000 in 2004; $18,000 in 2005; and $20,000 in 2006.

Faculty and staff who have a minimum of 15 years of Penn State service may be eligible to contribute more than the above maximums, depending upon the amount of the employee's prior tax deferrals.

The following are the maximum tax-deferred contributions available for 457(b) Deferred Compensation Plans:

All participants may contribute up to $11,000 this year; $12,000 in 2003; $13,000 in 2004; $14,000 in 2005; and $15,000 in 2006. In addition, this year participants age 50 or older may contribute an additional $1,000, bringing their maximum contribution to $12,000. That additional amount increases to $2,000 in 2003; $3,000 in 2004; $4,000 in 2005; and $5,000 in 2006, bringing the maximum contribution to a 457(b) for participants age 50 or older to $14,000 in 2003; $16,000 in 2004; $18,000 in 2005; and $20,000 in 2006.

An alternative additional contribution may be available to 457(b) participants during their last three years prior to retirement. The alternative could allow as much as twice the annual tax-deferral amount.

New salary reduction agreements for both 403(b) and 457(b) plans are necessary each year to increase contributions to the new maximum.

Q. Do these amounts apply in total for both the 403(b) and the 457(b) plans?

A. No. These amounts apply separately to each plan. If you're under age 50 in 2003, and you participate in both a 403(b) and a 457(b) plan you will be able to tax-defer as much as $24,000. If you're age 50 or older the maximum deferral amount will be $28,000.

Q. What are my investment choices for the Penn State 403(b) plan?

A. You may invest with any of the following TDA companies: Equitable, Fidelity, TIAA-CREF, VALIC and Vanguard. The number and type of investment choices will vary among these companies. More detailed information regarding TDAs, including specific investment choices, is provided in the Tax Deferred Annuity Summary on the Employee Benefits Division Web site at http://www.ohr.psu.edu/benefits/tda/index.htm.

Q. Will these same companies be available for my 457(b) plan?

A. No. In 2003, 457(b) plans will be available from TIAA-CREF and from VALIC, although additional plans may be offered at a later date. Separate applications and salary reduction agreements are required for enrollment in a 457(b) plan.

Q. When can I enroll in 403(b) and 457(b) plans?

A. You may enroll in either plan at any time. Enrollment forms and salary reduction forms must be received in the Employee Benefits Division office by the first business day of the month.

Q. Am I limited in my ability to change the deduction amount or the investments I've chosen?

A. You may increase, decrease or suspend your contribution each month, without limitation. You'll need to complete a new salary reduction agreement that reflects the new deduction amount.

Q. Where can I find more information about 403(b) and 457(b) plans at Penn State?

A. Additional 403(b) information is available in the Tax Deferred Annuity Summary, located on the Employee Benefits Division Web site at http://www.ohr.psu.edu/benefits/tda/index.htm. In addition to general information, the summary also provides detailed listings of available investments, contact numbers and links to the Web sites of each of the 403(b) companies.

Additional 457(b) information is available as part of the 2003 Time to Choose information on the benefits Web site as well as from TIAA-CREF and VALIC. Representatives from both companies will address questions regarding both plans during an upcoming Employee Benefits Open House at University Park.

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