403B PLAN

What is a 403(b) plan?

A 403(b) plan is a special type of employer-sponsored retirement plan for certain religious, public educational, and tax-exempt organizations. Typically, the employer either purchases annuity contracts for eligible employees, or establishes custodial accounts to be invested in mutual funds or other investments. In the case of annuity contracts, a 403(b) plan is sometimes referred to as a tax-deferred annuity or a tax-sheltered annuity plan (TSA). Depending on the specific type of 403(b) plan, plan contributions may be made by only the employee, only the employer, or both employee and employer (see below).

A 403(b) plan is not a qualified retirement plan, but it mimics such a plan in that it enjoys similar tax benefits. The most significant benefit is that participating employees are generally not taxed on their plan benefits (including both contributions and investment earnings) until they begin to receive distributions from the plan. Although an employer tax deduction may be possible, this is usually of little or no value, since the employer is exempt from income tax anyway.

Wycliffe has a 403(b) in place that utilizes two different funding vehicles (American Funds mutual funds, and Lincoln fixed annuity).  Many of you are receiving statements from both of these separately because you have allocated a portion of your savings to go into both vehicles.  This is because both Lincoln and American Funds offer unique benefits.  American Funds is our choice for utilizing the potential gains in the stock market through investing in mutual funds.  Lincoln is utilized as a source of guaranteed investment rate of return.  It is a fixed product that guarantees a percentage rate of return each year.  This Lincoln account will not fluctuate with the stock market when it is utilized correctly.

Caution:  If you are using any of the Sub-Accounts in your Lincoln 403b or your after-tax Lincoln account you need to contact FMN immediately to become fully aware of the implications.

What is the contribution limit for 403(b) plans?

The IRC contains overlapping limitations that apply when determining exactly how much can be put into a 403(b) plan.

For 2006, an employee may defer up to $15,000 of his or her compensation to a 403(b) plan on a pretax basis ($14,000 for 2005). This deferral limit is indexed for inflation after 2006. A "catch-up" retirement savings provision is also available for employees age 50 and over. These individuals may contribute $20,000 pretax for 2006 ($18,000 for 2005). These are the same contribution limits that apply to
401(k) plans.

Tip:  In addition, there are special catch-up contribution limits that apply to the 403(b) plans of certain organizations separate from the catch-up provision described above. Consult a tax professional for more information about these special contribution limits for 403(b) plans.

Also, total annual additions for any one participant in a 403(b) plan are limited to the lesser of $44,000 (in 2006, $42,000 in 2005) or 100 percent of the participant's compensation. Total annual additions are the sum of employer contributions and employee contributions, plus any reallocated forfeitures from other employees' accounts.

Tip:  As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, an eligible employee who participates in both a 403(b) plan and a Section 457 plan is now subject to a separate contribution limit for each type of plan. Prior to the act, the employee's contributions to the 403(b) plan had to be counted toward his or her Section 457 limit. This is an important change because it will allow many of these employees to significantly increase (double, in many cases) their total pretax salary-reduction contributions.

Tax advantages of 403(b) plans

Tax advantages for employees

As with many other types of retirement plans, employees who participate in a 403(b) plan can enjoy significant tax benefits, including the following:

• Pretax contributions: Employees' salary-reduction contributions to a 403(b) plan are made on a pretax basis. The contribution is taken directly from the employee's salary and invested in the 403(b) plan before any taxes are withheld. This means that the amount each employee defers to the plan is not included in his or her gross income. The employee pays less current income tax because his or her taxable income is lower than it would otherwise be.
• Tax-deferred growth: Funds held in a 403(b) plan grow on a tax-deferred basis. Any earnings on plan investments are not taxable as long as they remain in the plan. Only when an employee begins to receive distributions from the plan will he or she pay income tax on the earnings. Depending on investment performance, this creates the potential for more rapid growth (and a larger retirement fund) than money invested outside a tax-deferred plan.
• Possible tax credit: As a result of the 2001 Tax Act, some employees who participate in a 403(b) plan may qualify for a partial income tax credit for amounts deferred to the plan (Retirement Savers Credit). The amount of the tax credit (if any) is based on the employee's annual gross income and federal income tax filing status. For more information, see
• Tax Credit for IRAs and Retirement Plans.

Tip:  As a result of the 2001 Tax Act, an employer will be able to allow employees to make after-tax "Roth" contributions to the employer's 401(k) or 403(b) plan for tax years beginning after 2005. Under certain conditions, these contribution amounts and related earnings may be completely tax free when distributed to the employee from the plan. All of the rules and limits for pretax salary-reduction contributions will also apply to after-tax Roth contributions.

Tip:  Salary-reduction contributions (but not employer contributions) are generally subject to Federal Insurance Contributions Act (FICA)and Federal Unemployment Tax Act (FUTA) payroll taxes.