UNIVERSITY OF HOUSTON SYSTEM
ADMINISTRATIVE MEMORANDUM
SECTION:
Human Resources
AREA:
Fringe Benefits
NUMBER:
SUBJECT: Supplemental Retirement ProgramsRefunds of
Contributions to 403(b) Tax Sheltered Plans (ORP and TDA Plans)
1.
Excess
02.C.02
Employee
PURPOSE
The purpose of this administrative memorandum is to document the University of
1.1.
Houston System’s policies and procedures for complying with the Internal Revenue Code
requirements for contributions to Supplemental Retirement Programs. Internal Revenue
Code requirements for excess employee contributions to a tax sheltered annuity. The
Texas statute is not specific with regard to the administration of these plans. Therefore,
these policies and procedures have been adopted to address the administration of the plan
and should be considered part of the working plan document. The University of Houston
System sponsors two different 403(b) tax sheltered plans, Tax Deferred Annuities
(TDAs) and the Optional Retirement Plan (ORP). The Teachers Retirement System plan
is not a 403(b) plan and is not subject to these restrictions.
1.2.
The System sponsors three different voluntary Supplemental Retirement
Programs: Tax Deferred Annuities (TDA) 403 (b), Deferred Compensation 457
(b) and Roth IRA 403 (b).
1.3.
All employees of the System are eligible to participate in these voluntary
Supplemental Retirement Programs by setting aside part of their current salary
within defined limits.
1.4.
Each employee should recognize that: (a) participation in the Supplemental
Retirement Programs represents a firm, long-term commitment; (b) withdrawal of
benefits is contingent upon retirement, unemployment, serious financial hardship,
or death; and (c) comparison of cost and benefits between plans offered by two or
more companies or associations is the responsibility of the employee.
1.5.
The System assumes no liability or responsibility for income tax issues related to
the Supplemental Retirement Programs or the terms and provisions of any
contract issued there-under. Employees of the System are specifically prohibited
from counseling employees in the various aspects of financial and/or retirement
planning.
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2.
1.6.
A new participant may enroll in a Supplemental Retirement Program by executing
an agreement with the third party administrator prior to the first day of the month
in which enrollment is to be effective. Such execution must be done online, by
telephone, or through the completion of an enrollment form. Participants may
increase or decrease the amount of their contribution by executing an agreement
prior to the first day of the month in which the change is to be effective with the
third party administrator.
1.7.
The minimum monthly contribution to Supplemental Retirement Program is
$25.00.
1.8.
The maximum amount of salary which will qualify each tax year for tax
deferment must be determined annually by the employee and the third party
administrator in accordance with current IRS regulations regarding maximum
amount contributable. The third party administrator will notify the System when
the maximum amount contributable has changed. An additional amount may be
allowed under an approved catch-up provision. The employee should discuss the
catch-up options with the third party administrator.
1.9.
A participant may receive a distribution from his/her account as early as 51 days
after retirement/separation or as late as April 1 after the year in which the
participant reaches the age of 70 ½. Once the participant has retired/terminated
and reached age 70 ½, he/she must begin distribution.
1.10.
Participants should contact their third party administrator prior to separating
employment with the System to explore the distribution options available.
1.11.
The component university human resources department is responsible for
administering the policies and guidelines of the Supplemental Retirement
Programs at the System, and serving as liaison with the third party administrator.
Questions regarding Supplemental Retirement Programs should be directed to the
component university human resources department.
TAX DEFERRED ANNUITY
2.1.
A tax deferred annuity (TDA) or tax sheltered annuity (TSA) under Internal
Revenue Code Section 403(b) is a deferred compensation retirement arrangement
for employees of certain tax exempt organizations, including public educational
systems, such as including institutions of higher education.
2.2.
TDAs are funded primarily through salary reduction agreements whereby
employees reduce their annual gross salary by contributing a fixed amount
monthly to his/her individual TDATSA and/or ORP account. The employee’s
annual contribution to their individual annuity account is subtracted from his/her
annual gross salary, and the employee’s income taxes are calculated based upon
this reduced annual gross income figure.
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2.3.
2.4.
Questions regarding 3.
3.1.
3.
Contributions to TDAs and interest earned become taxable income to the
employee at the time he/she receives a distribution from the annuity account.
DEFINITIONS
Tax Deferred Annuity, including obtaining information on the approved TDA
Vendors, should be directed to the component university human resources
department.
DEFERRED COMPENSATION PROGRAM
3.1.
The Deferred Compensation Program is a voluntary supplemental - A retirement
program administered by the Employees Retirement System (ERS) under Internal
Revenue Code Section 457. While therefore, not subject to this administrative
memorandum, contributions to all plan that receives tax -deferred programs must
be considered in exclusion calculations. Employees should consult with their
component university benefits department to ensure compliance with the
combined limitations.
3.2.
Under the Deferred Compensation Program,treatment, benefiting an employee
may enter into an agreement with the state to reduce current by delaying payment
of taxes on employer contributions and earnings up to specified limits and to
apply the proceeds of such reduction to the purchase of a tax deferred retirement
savings account through an approved carrierby excluding them from income.
3.2.
Elective Deferral - Amounts contributed under the salary reduction agreement and
invested in the employee’s TDA/ORP by the employer on behalf of the employee.
3.3.
Exclusion Allowance - The amount of ORP (both employee and employer
contributions) and TDA employee deferral contributions that can be excluded
from income.
3.4.
Excess Contributions - The amount of employee deferral or employer
contribution that is more than the limit allowed for the year.
3.5.
MEA Worksheet - The form that is used to Deferred Compensation Programs and
interest earned become taxable incomecalculate all three of the annual
contribution limits.
3.6.
Special Catch-up Provision - The provision for employees with at least 15 years
service with the same employer to the employee at the time he/she receives
increase the elective deferral limit from $9,500 to a distribution from maximum of
$12,500. Limitations apply.
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4.
3.7.
ORP - Optional Retirement Program, a defined contribution retirement plan
offered by the State of Texas and limited to only certain employees of higher
education agencies.
3.8.
TRS - Teachers’ Retirement System, a defined benefit retirement plan offered by
the State of Texas to employees of public and higher education agencies.
3.9.
Carrier - The insurance company or custodian of money contributed to a TSA.
That entity which holds and invests funds in separate tax deferred accounts for
employees.
ANNUAL LIMITATIONS ON EMPLOYEE CONTRIBUTIONS TO 403(b) PLANS
4.1.
There are three separate, yet interrelated, limitations on the tax deferred amount
employees may contribute to their 403(B) plan. Each contribution limit is tested
separately, and corrections made differently for each limit excess.
4.2.
The three tax deferred employee contribution limits are determined as follows:
4.2.1. Elective deferrals limit, or 402(g) limit, is an arrangement under which
eligible employees elect to contribute a portion of their gross annual
salary, before taxes, to his/her TDA. The amount of annual salary
contributed to their TDA is not taxed until the annuity account.is
distributed, at which time the employees anticipate that their income tax
rate will be lower than at the time the contribution was made. This
arrangement is considered an elective deferral for purposes of the Internal
Revenue Code 403(b)(1), 401(a)(30) and 402(g). (This paragraph is
applicable to TDAs only since the ORP contribution is an irrevocable
election and, therefore, is not subject to elective deferral limits.)
3.4.
4.
Questions regarding Deferred Compensation Programs should be directed to the
component university human resources department.
ROTH IRA
4.1a.
The Roth 403(b) allows faculty and staffmaximum amount an
employee may contribute
to his/her TDA annually is $9,500.
Contributions to defer somea 457 plan reduces the $9,500 limit.
b.
However, Code Sec. 402(g)(8) provides a special “catch-up
election” which is intended to allow long term employees to catchup on funding of their retirement benefits if they were unable to
contribute the maximum allowable amount to their TDA in prior
years. This election allows eligible employees to increase the
dollar amount of their elective deferrals over the $9,500 limit.
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c.
Employees eligible for this election must have 15 years of service
with the same qualified employer. The 15 years of service must be
University of Houston System service; other state employment
years of service are not used in calculating the 15 years. An
employee with 15 years of service with the University of Houston
System may elect to contribute additional annual tax deferred
contributions in the following amounts, whichever is least:
1.
Additional annual tax deferred contributions in an amount
not to exceed $3,000, increasing the $9,500 limit to
$12,500; or,
2.
A total of $15,000 reduced by elective deferrals excluded
from gross income on an after-tax basis with earnings
growing tax free. in prior years under the catch-up rule
(total aggregate life-time limit of catch-up contributions is
$15,000). For example, if you are contributing the
maximum $3,000 per year to your TDA, then you could
only use this provision for 5 years; or
4.2.
The System allows faculty and staff the option to participate in both a traditional
403 b (pre-tax) and Roth 403 b (post-tax). However, if members want to
participate in both voluntary saving plans the aggregate contribution may not
exceed the maximum annual deferral limit.
4.3.
Questions about the Roth 403(b) should be directed to the component university
human resources department.
3.
$5,000 multiplied by the employee’s number of years of
service with the qualified employer, less all elective
deferrals in prior years.
4.2.2. Exclusion allowance limit, or Code Section 403(b)(2) limit, is a limitation
on the amount an employee may contribute to his/her ORP/TDA, based on
the individual employee’s maximum exclusion allowance (MEA). An
employee’s annual MEA is calculated by his/her ORP/TDA
representative, using a form similar to the one shown in Attachment A.
The MEA for amounts contributed by an employee to his/her ORP/TDA is
equal to 20 percent of the employee’s includable compensation multiplied
by the number of the employee’s years of service with the University of
Houston System, and reduced by amounts contributed by the employee or
employer to his/her ORP/TDA annuities in prior years. In addition, the
limit is also offset by the value of the contributions made to the TRS plan.
4.2.3. Annual additions limit, or Code Section 415 limit, is a limitation on the
amount of tax deferred contributions that an employee can make to his/her
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TDA/ORP when combined with the University of Houston System’s
contributions to the employee’s ORP. Under the general rule for 403(b)
plans, the limitation on the amount of contribution (employee’s
contribution combined with UH System’s contribution) to an employee’s
account is the lessor of:
5.
a.
$30,000, or
b.
25% of the employee’s annual gross salary.
CORRECTION OF EXCESS CONTRIBUTIONS
5.1.
If
Excess elective deferrals (402(g)).
5.1.1. An employee who has contributed an amount which exceeds the annual
contribution limit set by the IRSof $9,500, and if that employee has not
elected (or is not eligible) to participate in the “catch-up” option, the
employee will be refunded the excess amount contributed to his/her TDA
and applicable earnings on the excess amount contributed. Unless an
exception is available, The refund must be issued by the employee’s TDA
carrier by April 15th of the following year. The employee’s TDA carrier is
responsible for calculating the applicable earnings and for issuing a 1099R
to the employee.
5.1.2. If the carrier does not calculate the earnings on the excess contribution,
the Benefits Office may use a safe harbor calculation. The safe harbor
calculations are A&B as follows:
A.
Safe Harbor Method of Allocating Income.
Income for the taxable year
allocable to elective
contributions
Employee’s excess deferrals for
the taxable year
over
X The total account balance of the
employee attributable to elective
contributions at the beginning of
the year + the employee’s
elective contributions for the
taxable year.
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B.
Safe Harbor Method for Allocating Gap Period Income. Income
on excess deferrals determined under the preceding formula (A)
multiplied by the number of months that have elapsed since the
close of the taxable year. A distribution made on or before the
fifteen day of the month is treated as made on the last day of the
preceding month.
5.1.3. In accordance with the Internal Revenue Code, the excess contribution
amount refunded to the employee is includable as income in the “year of
contribution.””. The earnings on this excess are taxable in the “year of
distribution”. Two separate Internal Revenue Code forms 1099R will be
issued to the employee by his/her TDA carrier. The “year of contribution”
(prior year) tax liability will be reported on 1099R code P. The “year of
distribution” (current year) tax liability will be reported on 1099R code 8.
If
5.36.
5.2.
Exclusion allowance (403(b)(2)). The employee reduces his/her current annual
TDA contribution by the amount determined to be an excess contribution in the
prior year. In this case, it is not necessary for Internal Revenue Code forms (such
as 1099R’s) to be sent to the employee.
5.3.
Annual additions (Code Sec. 415). The employee will be refunded the excess
contribution and applicable earnings are not distributed by April 15thif the excess
contribution was a reasonable error in either the employee’s annual compensation
or elective deferrals before the end of the following “year of contribution,” the
excessyear (December 31). The employee will receive an Internal Revenue Code
form 1099R for the year the refund will again be taxed as income in the “year of
distribution.”is received (i.e., the year after the contributions were made) from
his/her TDA carrier.
PROCEDURES FOR REFUNDING EMPLOYEE EXCESS CONTRIBUTIONS
6.1.
It is the employee’s responsibility to not to exceed the annual various tax deferred
contribution limitations.
5.46.2. If an employee is contributing the maximum contribution as calculated by his/her
MEA, and if the employee receives a promotion with a higher annual
compensation rate or receives a merit pay raise, the employee should contact
his/her TDA/ORP carrier representative and prepare a new MEA calculation so
that the employee will not contribute an amount in excess of the contribution
limits.
6.3.
A new MEA calculation should be prepared by the employee and his/her
TDA/ORP carrier representative annually to ensure compliance with Internal
Revenue Code. A copy of the most current MEA should be forwarded by the
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AM No. 02.C.02
employee to his/her respective campus Benefits Office of the Human Resources
Department to be placed in his/her personnel file.
6.4.
6.5.
6.7.
To assist the employee in monitoring his/her annual contributions to their
TDA/ORP, the University of Houston System provides the following services:
a.
The Payroll Department will develop reports to be distributed to the
Human Resource Directors which will detail University of Houston
System employees who have exceeded, or are close to exceeding, Internal
Revenue Code limitations for employee contributions to his/her
TDA/ORP.
b.
The Human Resource Directors at each component will mail a letter (to
the most current employee home address listed in his/her personnel file) to
each employee on the list, stating that the employee has exceeded, or is
expected to exceed, the Internal Revenue Code contribution limits to
his/her TDA/ORP.
An employee who has contributed an amount in excess of the Internal Revenue
Code limitations guidelines to his/her TDA is responsible for the following:
a.
Notifying his/her TDA/ORP carrier representative that a new MEA
calculation needs to be prepared.
b.
Requesting a refund of the excess contribution and applicable earnings
from his/her TDA carrier representative.
c.
Ensuring that all required Internal Revenue ServiceCode forms are
obtainedfurnished to the employing department by his/her TDA carrier.
REVIEW AND RESPONSIBILITIES
Responsible Partiesy: Associate Vice Chancellor for Administration and Finance
Human Resource Directors
Review:
87.
AnnuallyEvery five years, on or before DecemberMarch 1
APPROVAL
Approved:
Executive Vice Chancellor for Administration and Finance
April 15, 1996; Draft June 1, 2008
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William P. Hobby
Chancellor
Date:
9.
April 15, 1996
INDEXING TERMS
Tax sheltered annuity (TSA)
Elective deferral
Exclusion allowance
Excess contributions
Maximum exclusion allowance (MEA)
Catch-up provision
Teachers’ Retirement System (TRS)
Optional Retirement Program (ORP)
Carrier
Safe harbor
403(b) plan
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