Guideline P-045
Subject: Deferred Compensation Plans
The purpose of this guideline is to provide guidance to those institutions which enter into agreements to establish deferred compensation plans or programs for the benefit of their employees. Such plans or programs are permitted by Internal Revenue Code sections 403(b), 401(k),and 457.
I. Tax Deferred Annuity, Section 403(b)
A. Institutions governed by the Tennessee Board of Regents and employees of such institutions may enter into agreements to participate in tax-deferred annuity plans or programs consistent with Section 403(b) of the Internal Revenue Code and related provisions of the Internal Revenue Code, regulations, rulings, etc., and subject to the provisions of this guideline and the Tennessee Board of Regents 403(b) Retirement Plan Document.
B. Vendors
1. The Tennessee Board of Regents may enter into an agreement with an approved company, financial institution, or other party (vendor) which offers a program qualifying as a Section 403(b) program. Such agreement shall be as prescribed by the Chancellor. This provision shall not cause any individual agreement in force on the date of the adoption of this guideline to be terminated, but no new contributions or individual participation agreements shall be executed with an unapproved vendor after December 31, 2008.
C. Plan Period
Where a "plan year" or other official period is needed, the plan year for the institution shall be the calendar year.
D. Internal Revenue Service Requirements
1. It is intended that all provisions of this guideline be consistent with provisions of the Internal Revenue Code, regulations, and other authoritative issuances of the Internal Revenue Service with respect to plans permitted by Internal Revenue Code Section 403(b) as amended from time to time. Any provision of this guideline is invalid to the extent such provision is not consistent with Internal Revenue Service provisions.
2. Unless otherwise provided in this guideline, it is intended that Internal Revenue Service provisions be controlling on such matters as limitations on contributions, withdrawal of contributions, payment of benefits, rollovers, and similar matters.
3. Notwithstanding D.1 and D.2 above, the Chancellor shall be empowered to establish reasonable requirements for the administration of the guideline, so long as such requirements do not conflict with any Internal Revenue Service provisions.
4. It is the intention of the Tennessee Board of Regents that an "excess contribution" as defined by Internal Revenue Service provision be returned to the participant as soon as administratively possible. Returned excess contributions would be reported as taxable income.
E. 403 (b) Eligibility
All employees of an institution/technology center/Central Office, except students scheduled to work less than twenty (20) hours per week, shall be eligible to participate in Section 403(b) programs.
F. Limitations and Contributions
1. The maximum contributions to a Section 403(b) program should be consistent with Internal Revenue Service provisions.
2. The minimum contribution should be at a rate of two hundred dollars ($200.00) per year.
3. Participants are required to report to the institution contribution information from participants who also participate in other qualified plans sponsored by an employer in which the participant has a controlling ownership interest (this includes employee and employer contributions to 401(k), 401(a), 403(b), simplified employee pension (SEPs) and Keogh plans). The contributions amounts to those other plans must be combined with the Tennessee Board of Regents 403(b) Retirement Plan contributions to determine whether the 415(c) limit has been reached. This is in accordance with Internal Revenue Service regulations.
4. An institution may decline to enter into any agreement that could, in the institution's opinion, cause the employee to exceed permissible contribution levels.
G. Employer
For the purposes of a Section 403(b) program, the employer shall be the Tennessee Board of Regents.
H. Selection of Vendor, Contract Ownership
1. All contributions under a participation agreement shall be paid to an approved vendor or vendors as selected by the employee. The institution will not recommend or endorse a vendor or vendor's program and will make no guarantee or assurances regarding the vendor. All responsibility for vendor selection and subsequent investment performance shall be between the employee and the approved vendor.
2. All contracts purchased under participation agreements shall be the sole property of the participant.
I. Participation Agreements
Each employee desiring to participate in a deferred compensation plan shall execute a written participation agreement on a form and in a manner designated by the Chancellor or his/her designee.
J. Approval of Participation Agreements
The Participation Agreement must be approved by the President or his/her designee.
K. Changes in Deferral Agreements
Changes in the amount of deferral may be made by submitting a new Participation Agreement form to the Human Resources Office within the timeframe established by the institution/technology center/Central Office.
L. Termination
An employee wishing to terminate his/her participation in a 403(b) plan must sign a notice of termination
M. Miscellaneous Provisions
1. Incidental Life Insurance. No agreements will be entered into which provide for any part of the contribution to purchase "incidental life insurance," notwithstanding that such purchase may be permissible under the Internal Revenue Code or regulations. Any employee participation agreements in effect when this Plan was adopted which includes incidental life insurance may be continued and/or revised for such employee.
2. Institutional Endorsement. The administration of an institution will not endorse or recommend in a positive or negative manner any vendor or vendor program. An institution may make available information which could be useful in a selection decision by an employee. This provision does not prohibit recommendation or evaluation by groups of employees or representatives of groups of employees.
3. For purposes of this guideline, "normal retirement" will be the age used by the Tennessee Consolidated Retirement System. Once an employee reaches or passes the normal retirement age, for purposes of calculating limitations on contributions for purposes of this Plan, such computation should be made assuming retirement at the end of the year for which the calculation is being made.
4. Withdrawals & Loans
Early in service withdrawals and loans shall not be permitted consistent with the Tennessee Board of Regents 403 (b) Retirement Plan Document and Internal Revenue Service provisions.
II. Tax Deferred Annuity, Sections 401 (k) and 457
Effective July 1, 1995, employees within the Tennessee Board of Regents system became eligible to participate in the State's 401 (k) and 457 deferred compensation program.
A. The Chancellor of the Tennessee Board of Regents is empowered to set appropriate administrative guidelines and procedures necessary to coordinate administration with the State of Tennessee.
B. Third Party Administrators and Vendors
Great West, hereinafter referred to as the "Company" is the third party administrator. The vendors are the companies selected by the State.
C. Plan Period
Where a "plan year" or other official period is needed, the plan year for the institution shall be the calendar year.
D. Internal Revenue Service Requirements
1. It is intended that all provisions of this guideline be consistent with provisions of the Internal Revenue Code, regulations, and other authoritative issuances of the Internal Revenue Service, the Tax Reform Act of 1986, and the Employee Retirement Income Security Act of 1974 (ERISA) with respect to plans permitted by Internal Revenue Code Section 401(k) as amended from time to time. Any provision of this Plan is invalid to the extent such provision is not consistent with Internal Revenue Service provisions.
2. Unless otherwise provided in this guideline, it is intended that Internal Revenue Service provisions be controlling on such matters as limitations on contributions, withdrawal of contributions, payment of benefits, rollovers, and similar matters.
3. Notwithstanding D.1 and D.2, the Chancellor shall be empowered to establish reasonable requirements for the administration of the guideline, so long as such requirements do not conflict with any Internal Revenue Service provisions.
4. It is the intention of the Tennessee Board of Regents that an "excess contribution" as defined by the Internal Revenue Service provisions be returned to the participant as soon as such administratively possible. Returned excess contributions would be reported as taxable income.
E. 401(k) and 457 Eligibility
All employees of an institution/technology center/Central Office, except students scheduled to work less than twenty (20) hours per week, are eligible to participate in the 401 (k) and 457 plans. Contingent upon appropriate funding each fiscal year, the employer may match an amount in addition to the employee's 401(k) contributions. However, only regular full-time and regular part-time employees are eligible to receive matching funds.
F. Participation Agreements
Each employee desiring to participate in a 401 (k) and/or 457 plan shall complete the appropriate Participation Agreement form.
A Participation Agreement form must be received by the Human Resources Office by the last working day of a month prior to the effective date of the first deferral and before the end of the first working day of a month for any subsequent payroll change, e.g., increase, decrease or cancellation.
Initial enrollment forms must be completed entirely; however, forms to restart deferrals do not require completion of the investment option section.
All forms containing changes (e.g., address, beneficiary, etc.) should be transmitted to the Company via the Human Resources Office.
G. Approval of Participation Agreements
The Participation Agreement must be approved (i.e., certified that the deferral amount has not exceeded the maximum allowed) by the President/Director/Chancellor or his/her designee.
The President/Director/Chancellor or his/her designee may decline to enter into an agreement that could, in his/her opinion, cause the employee to exceed permissible contribution levels.
H. Minimum and Maximum Deferral Calculations
401(k), 457, and 403 (b) contributions must be coordinated so that excess contributions are not made. Contributions (deferrals) for employees who also participate in the Optional Retirement Plan (ORP) are subject to additional limitations/restrictions. See the Deferred Compensation Manual for additional information.
Deferrals for 403 (b), 401 (k) and 457 plans may be deducted from regular or longevity pay. (See Section I for information regarding longevity deferrals.) "Advance" deferrals are not permitted (e.g., deferrals cannot be made before the money is earned).
1. Minimum deferral amounts per month
a. 457 Plan - $20.00
b. 401 (k) Plan - $20.00
2. Maximum deferrals for 457 and 401(k) Plans subject to applicable Internal Revenue Service (IRS) Limits.
I. Longevity Deferrals
Effective January 1 1998, a participant may elect to defer regular pay and/or any portion of their longevity bonus paycheck. A deferral from the longevity paycheck may be directed to the 403 (b), 457 or 401 (k) plan; however, it may not be divided among the plans. Due to the required deduction of the applicable Social Security taxes, the full amount may not be deferred.
A participant who elects to defer any portion or all of the longevity paycheck will be required to complete a Participation Agreement form specifically for longevity each year.
J. Changing Deferrals
Changes in the amount of regular paycheck deferrals may be made by submitting a new Participation Agreement form to the Human Resources Office within the timeframe established by the institution/technology center/Central Office.
K. Changing the Investment of Future Deferrals
1. Employees may change the way future deferrals are invested by completing an Investment Option Allocation form or by submitting a new Participation Agreement. Investment option changes do not require dollar amounts, only percentages.
2. Money on deposit is not affected by initiating a future change.
3. Employees will need to complete a seperate form for the 457, 401(k), and 403(b) if they participate in more than one plan.
L. Transferring Money on Deposit
1. Employees will need to complete a seperate form for the 457, 401(k) and 403 (b) if they participate in more than one plan.
2. Transfers are processed by the investment companies.
3. The investment of future deferrals is not affected by transferring money already on deposit.
M. Effect of a Leave of Absence on Deferrals
1. The deferred compensation program requires payroll deductions (reductions); therefore, participants may not pay contributions directly in order to receive matching funds that may be available.
2. When a participant returns from an unpaid leave of absence, deferrals can restart with the paycheck following his/her return to work.
3. The deferred compensation program does not contain a catch-up provision for employees who have been returned to a paid status retroactively. Therefore, double deductions are not permitted. Example: An employee on unpaid leave returns to work, but notification is not provided to Human Resources and/or Payroll for the affected pay period. When the next paycheck is processed, it will reflect a deferral and match (if funded) for only the current pay period.
N. Termination/Cancellation of Deferrals
1. An employee wishing to terminate his/her participation in a 401(k)or 457 plan must complete a Participation Agreement form in accordance with the provisions of Section II, F and indicate that a cancellation is being authorized.
Following cancellation of participation in the plan, administrative fees will continue to be charged for each month in which the principle is sufficient to cover the fee. Insufficient principle will result in final termination of participation in the plan.
2. Previous deferrals may not be withdrawn unless the employee meets one of the conditions for withdrawal. (See Section II, P.)
O. Withdrawals
1. Withdrawals shall be permitted by this Plan for the following reasons:
a. Retirement
b. Termination of employment
c. Death
d. Disability
e. Financial hardship (as defined by the plan)
f. Age 59 ½ - not available for 457 deferrals.
2. To make a withdrawal, the participants should contact the Company to obtain instructions and a withdrawal form. If the withdrawal is approved and it is for reasons other than retirement, termination of employment, death, or attainment of age 59 1/2, the Company will notify the institution/technology center/ Central Office to stop deferrals.
3. A request for withdrawal will be reviewed by a committee consisting of State employees (usually five members). Consideration for a hardship withdrawal will be based on the following definitions:
a. 457 Plan Hardship Definition
A severe financial hardship resulting from:
(1) Sudden and unexpected illness or accident of the participant or a dependent,
(2) Loss of the participant's property due to uninsured casualty, or
(3) Other similar or extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant.
Examples of non-qualifying circumstances: purchase of a home or car, educational expenses, payment of child support or alimony, bankruptcy or wage garnishment, past due credit card bills, or payment of taxes or tax penalties.
b. 401 (k) Plan Hardship Definition
An immediate and heavy financial need caused by one or more of the following:
(1) Unreimbursed medical expenses incurred by the participant or a dependent of the participant,
(2) Purchase of the participant's primary residence,
(3) Payment of college tuition for the next year for the participant or a dependent of the participant,
(4) Funeral expenses for an immediate family member of the participant which exceed life insurance coverage, or
(5) Official notification of implementation of eviction or foreclosure proceedings regarding the participant's primary residence.
Withdrawals may not include employer contributions or earnings accrued on your account after December 31, 1988. Federal regulations require that all deferrals be canceled for the remainder of the current year and for one calendar year thereafter. An employee who qualifies for a loan in the 401 (k)plan may be required to apply for such loan before applying for a hardship withdrawal from the plan.
Hardship withdrawals are subject to regular income tax and may be subject to the 10% early distribution tax penalty. Such distributions are not eligible for forward income averaging tax treatment or rollover.
3. Withdrawals Following Termination of Employment
Accounts smaller than $3,500 - A lump sum withdrawal or rollover to another tax deferred plan (if employee qualifies) is permitted for such smaller amounts.
Accounts larger than $3,500 - Employee may leave account in the State's plan.
4. Withdrawals Required Due to Age
Per IRS regulations, employees must begin drawing benefits no later than April 1 of the year following the age of 70 ½ or retirement. If the employee does not meet the required distribution provisions, a penalty tax is imposed equal to 50% of the amount that the employee should have withdrawn that year.
5. Charges on Withdrawals
Participants should contact the Company to determine if there are any surrender charges on their current investment options.
P. 401 (k) Loans
Active employees who have accumulated $4,000 or more in the plan may borrow up to half of the account balance. The minimum loan is $2,000; the maximum, $50,000. Employees are required to sign documents stipulating repayment via payroll deductions, normally in 5 or less years. Both the principal and interest go back into the employee's 401 (k) account. Employees should contact the Company for information on loan limitations and fees or for a copy of the loan brochure.
Q. Applying for Benefits
Benefits may be distributed in one of three ways: (1) lump sum, (2) periodic payments, or (3) in an annuity. Employees may not change the method of payment selected. Withdrawal application forms may be obtained from the Company. Annuity payment estimates and materials describing payment options are available on request.
Employees should obtain current information before selecting a payment schedule due to the fact that the provisions of this guideline may be revised by Congress.
R. Payment Options
1. Lump Sum Payment
a. Used to withdraw entire account balance.
b. May be only option available to participants with less than $3,500 in plan.
c. May be most beneficial option for participants who have more than 5 years in the plan and qualify for forward income averaging.
2. Periodic Payments
a. May be withdrawn in equal annual or monthly payments for a specified number of years.
b. Withdrawal period limited to life expectancy.
c. May be directly deposited into checking or savings accounts.
3. Annuity Payments
a. Investments risks for future years assumed by insurance company.
b. Payments made to participant or beneficiary regardless of investment returns.
c. Currently available through Aetna or Great West.
Types of annuity options:
1. Designated Period Annuity - Certain amount paid for specified period (e.g. 5, 10, 15 years).
2. Life Annuity - A certain amount paid to the participant for his/her lifetime. No payments made to beneficiary.
3. Life Annuity with Period Certain Feature - A certain amount paid to the participant's as long as he/she lives and also payments paid to a beneficiary for the "period certain" should participant's death occur prior to the end of the period.
4. Life Annuity with Joint & Survivor Feature - A certain amount paid to the participant for as long as he/she lives and continued payments to beneficiary after participant's death at 100% or 50% of original payment, depending on option elected.
S. Taxes on Withdrawals
1. Basic information
a. Must be reported when payments or withdrawals are received as income in the year(s) received.
b. Income from plan reported to both participant and IRS on appropriate tax form for each year payments are received.
2. Withholding taxes
a. Normally applied as payments are received. Amount of withdrawal and amount of taxes reported on W-2 statement for 457 plan; 1099-R form, 401 (k) plan.
b. Rate of taxation
(1) 457 plan - flat 28% rate
(2) 401 (k) plan - 20% on lump sum distributions and any other type of distribution received from plan which would be eligible for rollover.
(3) Withdrawals not subject to flat withholding tax - calculated as if recipient were married with 3 dependents unless a withholding certificate has been filed for a different amount. W-4 form used for 457 payments; W-4P, for 401 (k) payments.
c. Early distribution tax penalty
A 10% tax penalty is assessed on 401 (k) withdrawals made before 59 ½ except when distributions meet IRS exceptions.
It is the participant's responsibility to make the determination and payment of the early distribution tax penalty.
T. Five Year or Ten Year Forward Averaging
1. Eligibility is contingent upon a participant receiving a qualifying lump sum distribution from a 401 (k) plan after age 59 ½ and having 5 or more years in the plan. Participants born on or before 12/31/35 may be eligible for ten year averaging. Questions should be addressed to the Company.
2. Tax calculated as if money was received over 5 years and is calculated separately from tax on any other income.
U. Rollovers from Other Plans
Employees who previously participated in another government's Section 457 plan may apply to have the assets of the prior plan transferred to the State's 457 plan.
Employees who participated in another 401 (k) plan may apply to have their distribution from that plan transferred to the 401 (k) plan; however, the employee must be enrolled in the State of Tennessee Plan prior to applying for the transfer.
V. Plan to Plan Transfers and Rollovers to Other Plans
Upon separation from employment, a participant may move deferred compensation into another plan under the following provisions:
1. 457 Plan
The other plan accepts such transfers.
2. 401 (k) Plan
a. If a participant is eligible to withdraw accumulations, these may be moved to an IRA or a qualified retirement plan.
b. A distribution is eligible for transfer unless it is:
(1) Part of a series of substantially equal periodic payments made for the participant's life or life expectancy of for the life expectancy of a the participant and his/her beneficiary,
(2) Part of a series of substantially equal periodic payments made for a specified period of 10 or more years,
(3) A withdrawal a participant is required to take due to age.
c. Money may be transferred directly to the new plan or the participant may receive a check from the 401 (k) plan and make a rollover to the new plan.
d. Participants must arrange direct transfers when an application is submitted for withdrawal from the plan.
e. The plan must apply 20% withholding to any distribution which would have been eligible for direct transfer.
f. Prior service in TCRS may be purchased with a rollover from the 401 (k) plan when the participant becomes eligible to make a withdrawal from the 401 (k) plan. Excess amounts may be rolled into an IRA or reported as taxable income. TCRS should be contacted for additional information.
g. Participants who move their 401 (k) accounts into IRAs may want to set up special "conduit accounts" in the event they later become eligible to roll funds back into a qualified retirement account. (Withdrawals from IRAs are not eligible for income averaging.) Additional information on rollover and transfer rules may be obtained from the IRS.
W. Non-Assignability of Benefits
1. 457 Plan
a. Deferrals are assets of the State of Tennessee until paid to the participant or beneficiary.
b. Amounts cannot be assigned or attached to satisfy debts or obligations of an individual.
2. 401 (k) Plan
a. Accumulations are part of a qualified pension plan.
b. Assets are exempt from execution, attachment, garnishment, or other process, other than levies issued by the IRS.
c. Benefits cannot be given to an ex-spouse as marital property or as alimony.
III. Miscellaneous
A. For the purpose of a Section 401(k) program, the employer shall be the Tennessee Board of Regents and/or any of its institutions, the State of Tennessee, and the University of Tennessee System.
B. All responsibility for investment performance shall be between the employee and the vendor.
Source: TBR Presidents Meeting: November 13, 1990; November 9, 1993; November 8, 1995; August 13, 1996; November 12, 1996; February 5, 1997; May 6, 1997; February 17, 1998, August 10, 1999; November 5, 2008; February 17, 2009