Enrolled Agents Should Understand The Tax Implications Of 403b Plans

A 403(b) plan, often called a tax-sheltered annuity (TSA)

, is a retirement plan for certain employees of public schools, tax-exempt organizations, and certain ministers. It is very likely that an enrolled agent will one day prepare a tax return or offer tax advice to a client with a 403(b) plan. Our enrolled agent course does not cover these plans in detail as the rules have not been heavily tested in past ea exam questions. As 403(b) plans have become more prevalent, it is becoming more important for your enrolled agent education to include coverage of this topic.

A 403(b) has similar contribution limits and features to qualified plans such as the ability to borrow against a balance; however, a 403(b) is not necessarily a qualified plan for ERISA purposes. Employees cannot set up their own 403(b) account. Only employers can set up 403(b) accounts.

Any eligible employee may participate. The following employees are able to participate:

Employees of tax-exempt organizations established under section 501(c)(3) of the Internal Revenue Code.

Employees of public school systems who are involved in the day-to-day operations of a school.

Employees of cooperative hospital service organizations.

Civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS).

Employees of public school systems organized by Indian tribal governments.

Certain ministers.

Individual accounts in a 403(b) plan can be any of the following types:

An annuity contract, which is a contract provided through an insurance company,

A custodial account, which is an account invested in mutual funds, or

A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.

Generally, the maximum amount contributable (MAC) to a 403(b) account is limited to the lesser of:

The annual additions limit - For 2009 the limit is $49,000 or 100% of compensation for the most recent year, whichever is less.

The elective deferral limit - In general, an employee may not contribute more than $16,500 for 2009 (unchanged for 2010). There is a special rule for those with at least 15 years of service giving them the potential to contribute up to $3,000 more. Additionally, those over 50 are eligible for a catch-up contribution of up to $5,500 for 2009

If, for any year, elective deferrals are contributed to multiple retirement accounts for you (whether or not with the same employer), consider all contributions to determine whether the total is more than the limit for that year. The limit on elective deferrals applies to amounts contributed to:

401(k) plans, to the extent excluded from income,

Section 501(c)(18) plans, to the extent excluded from income,

SIMPLE plans,

Simplified employee pension (SEP) plans, and

All 403(b) plans.

IRS Circular 230 Disclosure - Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

by: Sawyer Adams

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