In order to participate in a TSA or TDA, employees must enter into a contract with their employer agreeing to make elective deferrals into the plan.
The salary reduction agreement will state the amount and frequency of the elective deferral to be contributed to the TSA. The agreement is binding on both parties and covers only one year of contributions. Each year a new salary reduction agreement must be signed to set forth the contributions for the new year. The employee's elective deferral is limited to a maximum of $17,500 per year. Employer contributions are limited to the lesser of 25 percent of the employee's earnings or $52,000.
TAX TREATMENT OF DISTRIBUTIONS
All distributions for TSAs/TDAs are taxed as ordinary income in the year in which the distribution is made. Distributions from a TSA/TDA prior to age 59 1/2 are subject to a 10 percent penalty tax as well as ordinary income taxes. Distributions from a TSA/TDA must begin by age 70 1/2 or be subject to an excess accumulation tax.
A corporate retirement plan can be qualified or non-qualified. We will first review the non-qualified plans.
NON-QUALIFIED CORPORATE RETIREMENT PLANS
Non-qualified corporate plans are funded with after-tax dollars and the money is allowed to grow tax-deferred. If the corporation makes a contribution to the plan, they may not deduct the contribution from their corporate earnings until the plan participant receives the money. Distributions from a non-qualified plan that exceed the investor's cost base are taxed as ordinary income. All non-qualified plans must be in writing and the employer may discriminate as to who may participate.
The employee may set up a payroll deduction plan by having the employer make systematic deductions from the employee's paycheck. The money, which has been deducted from the employee's check, may be invested in a variety of ways. Mutual funds, annuities, and savings bonds are all usually available for the employee to choose from. Contributions to a payroll deduction plan are made with after-tax dollars.