1. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? Tax deferred employee retirement plan that can only be adopted by certain - tax exempt organizations - public school systems Benefits - contribution not taxed currently - account balances accumulate tax-free - defer tax on contributions and earnings

2. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it indicated? 1.Eligible employer - tax exempt organization - public school or college 2.employer wants low-cost tax deferred retirement plan

3. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 When is it indicated? 3.employees - want choice regarding level of savings - are young with time to retirement - willing to accept some investment risk 4. employer wants “savings-type” supplement to defined benefit or other qualified plan

4. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 When is it indicated? 5.Other considerations - non-governmental, tax-exempt employers can also offer Sec 401(k) plans - tax-exempt employers and governmental entities can maintain SIMPLE IRA plan

5. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 What is a tax-exempt organization? Meets qualifications of IRC Code Sec. 501(c)(3) –organized and operated exclusively for religious, charitable, scientific, testing for public safely, literary, or educational purposes, or to foster national or international amateur sport competition or for the prevention of cruelty to children or animals –must benefit public, not individual or private shareholder –refrain from political campaigning or propaganda intended to influence legislation

6. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 What is an educational organization? An educational organization has a regular faculty and curriculum regularly enrolled student body in attendance that is operated by a state or municipal agency Can also adopt a TDA plan for certain employees outside of the schools who perform services involving the operation or direction of the public school education program

7. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Advantages 1.Tax deferred retirement savings 2.Employees have choice about amount to save 3.Can fund plan entirely through salary reduction 4.In-service withdrawals are permitted

8. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Disadvantages 1.Plan balance may be inadequate for employees entering plan when older 2.Employee annual salary reduction subject to elective deferral limit 3.Plan can be costly and complex to administer 4.Employees bear investment risk

9. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Design Features: Salary Reductions Employees elect salary reductions before compensation earned Employer can also provide annual ‘bonus’ that employees can receive in cash or contribute to plan

10. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 Plan contributions have per employee limit applied to total contributed to: –Sec. 401(k) –salary reduction SEPs – if established before 1997 –SIMPLE IRAs –Section 403(b) TDA plans However, “double-dip” opportunity exists with Sec. 457 plans

11. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Total of all elective deferrals must not exceed: 2009$16,500 Index in $500 increments

12. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 Employees reaching age 50 during plan year can make additional ‘catch-up’ contributions in plans using elective deferrals: $5,500 in 2009 * * $500 increments

13. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 Design Features: The TDA Salary Reduction Catch-Up TDA plans have unique, additional catch-up features IF employee has 15 years of service and employer is –educational organization –hospital –home health care agency –health and welfare service agency –church, synagogue, or related organization

14. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 Design Features: The TDA Salary Reduction Catch-Up If previous conditions met, the elective deferral limit is increased by an additional sum equal to the LEAST of –$3,000; –$15,000, reduced by the sum of (1) prior use of catch-up provision, and (2) the aggregate amount of designated Roth 403(b) contributions for prior tax years; or –$5,000 times years of service with employer less all prior salary reductions with employer

15. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 Design Features: Employer Contributions TDA plans allow employer contributions –can use to encourage or augment employee contributions –typically use formula matching contributions –with employer contributions, complex nondiscrimination requirements must be met

16. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 Design Features: Section 415 Limits employer contributions employee contributions +forfeiture from other participant accounts annual additions Annual additions to each participant's account cannot exceed LESSER of: - 100% compensation - $49,000 (2009, indexed)

17. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 Design Features: Nondiscrimination Requirements With some exceptions, under current regulations TDA plans must satisfy rules similar to nondiscrimination rules that apply to regular qualified plans –Rules relating to nondiscrimination in contributions and benefits (IRC Section 401(a)(4))

18. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 Design Features: Nondiscrimination Requirements –Can consider only first $245,000 (2009) of each participant’s compensation in plan contribution formula –Minimum coverage of non-highly compensated employees (Sec. 410(b)) –Rules aggregating related employers for nondiscrimination testing purposes

19. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company19 Design Features: Nondiscrimination Requirements “Universal Availability” All employees must be permitted to make elective deferrals if any employee may do so employer can require minimum salary reduction up to $200 to participate

20. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company20 Design Features: Vesting Employee always 100% vested in contributions made via salary reduction and earnings on those amounts Employer contributions can require vesting –must follow rules for top-heavy plans 3 year cliff or 2-6 year gradual vesting

21. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company21 Design Features: Plan Investments Can be in either or both: –annuity contracts purchase by the employer from an insurance company OR –mutual fund shares held in custodial accounts

22. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company22 Design Features: Plan Distributions Follow qualified plan distribution rules In-service withdrawals permitted, but unless withdrawal qualifies for an exception, it is subject to 10% early withdrawal penalty All withdrawals subject to income tax Many TDA plans allow plan loans

23. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company23 Tax Implications 1.Employees defer tax on salary reductions and employer contributions if amount under limit 2.Salary reductions (but not employer contributions) subject to Social Security (FICA) and federal unemployment (FUTA) payroll taxes 3.Limited nonrefundable tax credit available to certain lower income taxpayers making salary deferral to TDA

24. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company24 Tax Implications 4.Amounts contributed by employer to ‘deemed IRA’ reduce limit for contribution to traditional or Roth IRA 5.Can exclude from current income trustee to trustee transfer of funds from TDA to governmental defined benefit plan 6.Plan distributions must follow qualified plan distribution rules 7.Plan distributions subject to income tax; 10 year averaging not available

25. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company25 ERISA Requirements ERISA rules generally apply to TDA plans to same extent that ERISA applies to qualified plans Possible ERISA exemptions –TDAs of governmental and church organizations –plans with minimal employer involvement

26. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company26 How to Install a Plan Written plan document now required for all plans under final regulations Salary reduction forms must be completed before plan’s effective date Effective communication with employees essential if employer objectives and nondiscrimination tests are to be met

27. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company27 True or False? 1.As an educational organization, a private university can adopt a TDA plan. 2.TDA plans are not effective if an employer cannot afford to match employee contributions. 3.Employers bear the investment risk in TDAs. 4.TDA plans allow employees to make in-service withdrawals. 5.TDA plans can be complex and costly to administer.

28. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company28 True or False? 6.Janet, age 47, earned $75,000 in 2009. She is covered under a TDA plan funded exclusively through employee salary reductions. The maximum she may contribute to the TDA plan in 2009 is $16,500. 7.An employer can require a minimum salary reduction as a condition for TDA plan participation. 8.TDA plan participants are always 100% vested in all plan contributions.

29. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company29 True or False? 9.“Incidental life insurance” protection under annuity contracts is not permitted in a TDA plan. 10.A TDA plan subject to ERISA must provide a qualified joint and survivor annuity or provide that at participant’s death, 100% of nonforfeitable benefit be paid to the surviving spouse.

30. Tax Deferred Annuity Chapter 25 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company30 Discussion Question Since a 501(c)(3) organization can sponsor both Section 401(k) plans and TDA plans, what are the considerations in choosing between the two?