12-P-012 Deferred Compensation and Tax Sheltered Annuity (Supersedes 09-P-010)
|DATE:||November 1, 2011|
|SUBJECT:||Deferred Compensation and Tax Sheltered Annuity
Limits for Calendar Year 2012
|EFFECTIVE DATE:||January 1, 2012|
(Original Signature on File)
2012 Deferred Compensation and Tax Sheltered Annuity Limits
Pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the annual Deferred Compensation and Tax Sheltered Annuity (TSA) limits will change effective January 1, 2012 as follows:
457(b) Deferred Compensation:
The Deferred Compensation (Benefit Plan 457DEF) annual contribution limit is increased from the lesser of $16,500 or 100% of includible compensation (2011 calendar year limit) to the lesser of $17,000 or 100% of includible compensation.
The Deferred Compensation special catch-up (Benefit Plan 457DER) limit is increased from $33,000 (2011 calendar year limit) to $34,000. The special catch-up limit is twice the general deferral limit, and is only available to employees who are within three years of normal retirement age.
The Deferred Compensation catch-up provision for participants who are 50 years of age or older (Benefit Plan 457DEC) remains the same with an annual contribution limit of $5,500 for 2012 making the total $22,500.
Please note that the two different catch-up provisions cannot be used concurrently.
403(b) Tax Sheltered Annuities (TSA):
The limit on annual contributions to a TSA for 2012 is the lesser of $50,000 or 100% of compensation, increased from $49,000 for 2011.
The annual compensation limit used for calculating mandatory employee and employer contributions is increased from $245,000 (for 2011) to $250,000 (for 2012). The $250,000 applies to the mandatory retirement plans for the School of the Blind, School for the Deaf, and Kansas Board of Regents (for employees whose participation began after 1995). For School of the Blind and School of the Deaf employees, the maximum contribution that can be made to the plan is $25,000 ($250,000 maximum annual compensation multiplied by 10%, 5% employer contribution and 5% employee contribution). For Board of Regents employees (participants after 1995), the maximum contribution that can be made to the plan is $35,000 ($250,000 maximum annual compensation multiplied by 14%, 8.5% employer contribution and 5.5% employee contribution).
For employees participating in the Kansas Board of Regents’ mandatory plan prior to 1996, participants are ‘grandfathered’ and use the annual compensation limit under Internal Revenue Code Section 401(a) (17). The 401(a) (17) limit is increased from $360,000 (for 2011) to $375,000 (for 2012). However, participants should note their maximum annual compensation limit will be $357,142.86, since the $357,142.86 annual compensation multiplied by the 14% contribution rate (8.5% for the employer and 5.5% for the employee), results in $50,000, which is the limit on annual contributions.
The limit on elective deferrals (Voluntary Tax Sheltered Annuities) is increased from $16,500 for 2011 to $17,000 for 2012. The age 50 or older catch-up provision remains the same at $5,500 for 2012. Therefore, an employee age 50 or over is eligible to increase their elective deferral and limit on an annual contribution by $5,500. Additionally, there is a 15-year rule which may allow employees with 15 or more years of service to increase the elective deferral limit by an additional $3,000. Employees may use both the age 50 catch-up provision and 15-year rule concurrently. IRS regulations issued in 2003 state that when employees are eligible for both the 15-year rule and the age 50 catch-up provision, the limit on elective deferrals ($17,000 for 2012) is applied first, then the 15-year rule, and finally the age 50 catch-up provision.
Please note that the total of nonelective deferrals (the mandatory retirement plans) and elective deferral (VTSA) cannot exceed the limit on annual contributions plus the age 50 or older catch-up provision amount (if applicable).
Regents’ institutions are reminded that they are responsible for applying the maximum VTSA formulas for their employees. Please note that this circular only provides a summary of the law in this area. Due to the complexity of the legislation and the unique circumstances of each employee, Regents’ institutions are strongly encouraged to contact the 403(b) carriers to aid in determining limits in those cases which are outside the norm (the employee is near the limit on annual contributions, the employee is near the elective deferral limit, the employee wants to use the age 50 catch-up provision, or the employee wants to use the 15-year rule).
Finally, the EGTRRA Act of 2001 repealed the coordination requirements for employees who participate in both a 457(b) Deferred Compensation Plans and 403(b) Tax Sheltered Annuity plans. Employees eligible for both plans continue to be able to defer the full amount to both plans.