Understanding the 415(c) Annual Addition Limit| Examples |
| Understanding the 415(c) Annual Addition Limit |
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Understanding How the 415(c) Annual Addition Limit Applies to the TSP
The annual additions limit is set each year by the Internal Revenue Service and affects participants who contribute tax-exempt contributions to the TSP while deployed in a designated combat zone. The limits are $45,000 for 2007 and $46,000 for 2008. Contributions made from pay attributable to the Combat Zone Tax Exclusion are tax exempt, and therefore do not count toward the elective deferral limit ($15,500 for 2007 and for 2008). The annual addition limit, however, includes all employee contributions to the TSP, both tax-exempt and tax-deferred, and any agency contributions. Over-50 Catch-up contributions (up to $5,000 for 2007 and for 2008) do not count towards the elective deferral or the annual additions limit. When a participant reaches the annual additions limit in his or her uniformed services account, the TSP cannot accept any more tax-exempt or tax-deferred contributions.
Participants who contribute to their uniformed services TSP account while in a combat zone and their civilian TSP account in the same year should be aware of the 415(c) annual addition limit and how it may affect their TSP accounts. The TSP will allow a participant to make contributions to both accounts during the year and will apply IRS limits separately to each TSP account. In January, the TSP will combine amounts contributed for the prior year to determine whether IRS limits were exceeded. Participants who exceed any of the IRS limits will receive a refund of the excess contribution amount and earnings accrued on that amount. The refund will be deducted from their uniformed services account. The TSP will pay the refund from tax-deferred contributions. However, if tax-deferred contributions are not sufficient to pay the refund, the TSP will deduct the remainder from tax-exempt contributions.
Below are examples of how a participant with a uniformed services and civilian TSP account can exceed the 415(c) limit:
Example 1
A uniformed service member is deployed in a designated combat zone. He expects to retire shortly after returning from his deployment. To take advantage of the additional contributions he can make to the TSP while in a combat zone, he contributes $44,000 in tax exempt contributions. He returns and contributes another $2,000 in tax-deferred contributions to the TSP and then retires. In September, he is employed by the Federal government in a position covered by FERS and is immediately eligible to contribute to his civilian TSP. He will not become eligible for agency contributions until June of the following year, but elects to contribute to the TSP for the remainder of the year. By the end of the year, he contributes $4,000 in tax deferred contributions to his civilian TSP account.
In January 2009, the TSP identifies the participant as exceeding the 415(c) limit by $4,000. The TSP will send the participant a check for $4,000 (plus earnings) from his uniformed services TSP account. When the check is sent, $2,000 of the check will reflect the tax-deferred contributions he made to his uniformed services TSP account; the remaining amount will reflect tax-exempt contributions.
The participant must report the $2,000 of tax-deferred contributions paid to him as income earned in 2008 (the year the participant made the contributions). The participant must report the earnings attributable to both the tax-exempt and tax-deferred disbursement as income earned in 2009(the year the excess earnings were paid to the participant).
Example 2
A Federal civilian employee is also a member of the uniformed services. In December, she is placed on active duty to deploy to a designated combat zone. She elects to contribute to her uniformed services TSP account, knowing that, as a FERS employee, she is entitled to retroactive Agency Matching Contributions in her civilian TSP account upon her return, based on contributions made from basic pay to her uniformed services TSP account. She also knows that while on active duty in a designated combat zone she can contribute more from tax-exempt income than she can from pre-tax income. In January, she deploys to a combat zone and increases her contributions to the TSP. By July, she contributes the maximum ($46,000) to her uniformed services TSP account. In September, she returns to her civilian job from her active duty deployment and continues her regular pre-tax contributions to the TSP account. As a FERS employee she is eligible for Agency Automatic (1%) and Matching Contributions. She submits her military pay stubs to her agency to receive retroactive agency contributions for the period she was in non-pay status, but contributed to her uniformed services TSP account. Her agency deposits $2,200 in retroactive Agency Automatic (1%) and Matching Contributions, plus breakage. In addition, as she continues to earn basic pay and contribute to the TSP for the remainder of the year, she receives agency contributions. By the end of the year, she has contributed $8,000 in pre-tax contributions to the TSP and received the entire amount of Agency Automatic (1%) and Matching Contributions she was entitled to for the year; $4,400. The total amount of contributions that have been contributed to both TSP accounts for 2008 is $58,400. In 2009, the TSP identifies the participant as exceeding the 415(c) limit between her two TSP accounts and returns $12,400 in tax-exempt contributions and attributable earnings from the uniformed services TSP account.
Because the total amount of contributions returned was from tax-exempt contributions, she will not have to report the amount as taxable income earned. In the next year she will report the attributable earnings on the $12,400 returned to her as income earned.
Example 3
A FERS participant has both a civilian and uniformed services TSP account. He elects to contribute regular and over-50 catch-up contributions to his civilian TSP account. He contributes the maximum catch-up contribution ($5,000) by April and continues to make regular tax-deferred TSP contributions. In July, he is brought on active duty to deploy to a designated combat zone in the following month. Knowing he will be able to contribute more to his uniformed services TSP from tax-exempt income, he increases his TSP uniformed services contribution election. By the end of the year, he has contributed $38,000 to his uniformed services TSP. However he also contributed $7,000 to his civilian TSP prior to being deployed. As a FERS covered employee he received $2,500 in Agency Automatic (1%) and Matching Contributions in his civilian TSP account. In January 2009, the TSP identifies this participant as exceeding the 415(c) limit and a pays $1,500 and accrued earnings from the uniformed services account. Although the total contributions to both TSP accounts equaled $52,500, the over-50 catch up contributions were not applied to the 415(c) annual addition limit; therefore, the refund of excess contributions was based only on regular employee contributions to both TSP accounts and agency contributions made to his civilian TSP account.