Anybody know what this is about?

[WhiteOleander]

I copied this from another site. (not tax related)

It is from TSTA, Texas State Teachers Assoc.

~*~*~*Recent changes have been made to income tax regulations which affect school employees who are paid out over 12 months. Many public school employees who work less than a full year chose to have their salary evenly distributed over 12 months. This is commonly referred to as “annualized compensation.”

New IRS regulations state that annualized compensation may be subject to an additional 20% excise tax. An employee can avoid this tax if the employee elects, in writing, to have his compensation annualized before an employee begins work for 2007-2008 school year. This regulation applies to both contracted and non-contracted school employees.

To avoid the penalty, if an employee who works less than 12 months wishes to have his salary spread over 12 months, the employee must make a written election to annualize his compensation. Most school districts have been advised of these new regulations and should provide employees with an election form. If your district does not have such a form, contact TSTA.

If an employee fails to make a written election by the first day of work of the new school year, the safest course of action would be to request non-annualized payments (receive pay on a 10- or 11-month basis, as applicable).

Once the election to annualize compensation has been made by the employee, it may not be revoked. Employees must elect to have their compensation annualized at the beginning of each new school year.

If you do not wish to annualize your compensation (because you either prefer to be paid on a 10- or 11-month basis, or because you did not sign the annualization form by the first day that you begin working), you may choose not to have your compensation annualized. If your district does not allow this procedure, contact TSTA.~*~*~*

[Jiggers]

20% Excise Tax

No way. I just read the same site.

No way is there a 20% "EXCISE" tax on these wages. 20% Witholding maybe.

Remember this was written by a school organization!

I would ask TSTA for an IRS reference.

[JAinNC]

Public schools in this area (and probably the state) have had this form. I get calls from 1st year and new year teachers begining the school year. They may elect (only at the beginning) to spread their salary over 12 months instead of 10.5 months. This is a beneficial way if the teacher does not want to have no pay checks in the summer.

I have heard nothing of an excise tax. Perhaps the article used incorrect terminology.

[JohnH]

A Better Way

Back when my wife first became a school teacher, we wouild work up an estimate of what her net pay would be over 12 months. She would then make the election to take her pay over the 10 month period and we would have the difference in the net pay deposited directly into her Credit Union savings account as a payroll deduction. This enabled her to receive the same net amount each month as she would have received using the 12-month option, and the other two month's net pay would be sitting there in the savings account when summer rolled around.

The purpose was not so much to earn interest on the money, but rather to make it a game to try and get through the summer without withdrwaing the full 2 months of pay. In the early years, sometimes it was possible and sometimes it was not, but it was an effective financial discipline. I'd recommend it to any teacher who has this type of option available.

[Brad Imsdahl]

The story is true.

I’m afraid the story from TSTA is true. There is a 20% excise tax under Code Section 409A(a)(1)(B) for failing to meet certain requirements under a nonqualified deferred compensation plan.

I haven’t read the regulations to know whether the specifics described in that article are correct. However, I can see where a teacher that is paid over a 12 month period but only works 10 months would fall under a form of a nonqualified deferred compensation plan. In order to stretch 10 months of earnings over a 12 month payout, some of the compensation will be deferred from one year to the next. That is a nonqualified deferred compensation plan. If the rules that govern how to do it are not followed, the employee is subject to income tax, plus interest, plus a 20% excise tax on the income that should have been reported in the year earned.

One of the exceptions under Code Section 409A talks about an election where the participant elects to defer the compensation before the close of the preceding tax year. [IRC §409A(a)(4)]

I will make a note in our files to research this further and possibly use a teacher as an example for our deferred compensation coverage in Tab 13.

[Joe Btfsplk]

I’m afraid the story from TSTA is true. There is a 20% excise tax under Code Section 409A(a)(1)(B) for failing to meet certain requirements under a nonqualified deferred compensation plan.

I haven’t read the regulations to know whether the specifics described in that article are correct. However, I can see where a teacher that is paid over a 12 month period but only works 10 months would fall under a form of a nonqualified deferred compensation plan. In order to stretch 10 months of earnings over a 12 month payout, some of the compensation will be deferred from one year to the next. That is a nonqualified deferred compensation plan. If the rules that govern how to do it are not followed, the employee is subject to income tax, plus interest, plus a 20% excise tax on the income that should have been reported in the year earned.

One of the exceptions under Code Section 409A talks about an election where the participant elects to defer the compensation before the close of the preceding tax year. [IRC §409A(a)(4)]

I will make a note in our files to research this further and possibly use a teacher as an example for our deferred compensation coverage in Tab 13.

This could affect all Texas teachers.

I'm sending this to my daughter to pass on the the teachers in her school. I don't think it affects her personally since her job requires her to works all 12 months

Some teachers also work summers and get paid their regular pay plus an extra amount for working in the summer. The extra summer pay probably would not be affected since I don't think it is ever spread out over the year.

[WhiteOleander]

Thanks Paul.
We have alot of teachers come to our office. I'm sure we will get some calls on this. The way I understand it, I think TSTA is sending out notices to all the members. So, now I will be able to explain it somewhat to them.

I am shocked that it is an excise tax. But, it is what it is as they say.

[Jiggers]

Just curious, why?

Just curious as to why there would be this type of regulation? Just to trip up the unwary?

[S T]

Calif

Guess I will have to research California Teachers.

I have quite a few teachers in Calif, that for years, have opted to receive their compensation over 12 months, rather than 10 months. It has never been questioned and I have never researched it.

Sandy

[Corduroy Frog]

Rubbish

Guys and Gals, this is rubbish, even if it be true. As Bees Knees has so often said, "It doesn't have to be logical to be tax law."

The amount actually deferred is a joke. At any given point in time, the maximum deferral is only 1/5 of a teacher's salary, and that would only occur at the END of a 10-month period -- rarely (if ever) occurring at the end of the calendar year. The so-called "deferral" dries up without exception two months after its apex.

There is no indication of a deferral required on the W-2. There is no "qualified plan." And heaven knows, there is no "tax-sheltered earnings."

Actually, what I think needs to happen is a slugfest in U S Circuit Court (not Tax Court). The State of Texas in fact might be a worthy party to do this. (Governments love to "tag team" individuals in court, but rarely face off against each other. In fact, I think the US Treasury would back down if challenged.) This is obviously an election for personal financial planning and nothing more than a payroll arrangement for school systems. No one other than the IRS would try to create a deferred income scheme out of this.

[Bees Knees]

There is no deferral if you put the full salary in the year earned. If you make $50,000 per year for 10 months, that is $5,000 per month. That means for September through December of the current year, your W-2 should report $20,000. Nobody at IRS will have a cow if you do it that way.

The problem is when the school spreads that $50,000 over 12 months, or in other words, $4,167 per month. Since the teacher only received $16,667 of gross pay for the current year, that means there is a deferral of $3,333.

That deferral is not made up within the first few months of the following year because the deferral continues until July and August of the following year. That amount of deferral is high compared to normal qualified retirement plan contributions for a similar amount of pay. And since this is a nonqualified plan, the special rules of Section 409A kick in to prevent abuse.

Again, if the employer simply reports the $20,000 in the year earned, there would be no problem, except for the fact the teacher isn't going to like paying tax on money that has not yet been received.

[outwest]

Guys and Gals, this is rubbish, even if it be true. As Bees Knees has so often said, "It doesn't have to be logical to be tax law."
.....

No one other than the IRS would try to create a deferred income scheme out of this.

Well, first off, Congress is the one to point the finger at. Second, the main target was corporate executive and abusive arraignments of (often) doctors. I've seen several packages in the past based on NQ deferred comp marketed to docs and corp execs. Congress wanted to close that off.

Teachers are collateral damage but the solution is easy. Just sign the paper and move on as before. No big deal.

[Corduroy Frog]

Payroll Arrangements

Outwest - good post, but you're giving Congress members too much credit. It is indeed the planners and statisticians from IRS who calculate numbers for the budget and then shove packages under the noses of those in the ways and means committee.

I agree that teachers were "collateral damage" on an effort intended to fry bigger fish. But what about the simple practice of paying your employees a week in arrears? This time-honored practice deferred $3,461,538 (one weeks' pay) just on one employee alone - the Home Depot president. If they are so concerned with teachers, why aren't they going after these guys?

When I was an employee, I once worked for an employer who withheld an entire months' pay. The way the calendar fell, I was there six weeks before getting a paycheck. I didn't qualify for treatment under wage & hour laws, and the employer used the money for cash flow. When people built enough vacation time and needed money real bad, they quit. It was like a fat termination pay package. Why aren't they going after people like this?

Outwest, I guess you don't know. I appreciate your insightful comments, and glad you are frequent poster.

[outwest]

Good points..

but I'd suspect why this one was attacked and many others ignored was political heat.

Anyway, this reminds me of the accounting prof that paused in class to explain to some starry eyed young students that estimates are all through GAAP and GAAP itself consists of arbitrary rules we accountants made up out of thin air. Accounting to the penny is an illusion so get over it and move on.

Stunned silence in class...

He then pointed out that, within it's limitations, there is useful information in accounting. We just ignore some things because it's not worth the effort to track (say small pay deferrals because payroll is not handed out at the end of each day) but pay attention to other similar issues (such as executive deferrals for months or years) when they seem large enough to matter.

And the line is found by consensus but remains arbitrary...

Well now back to my arbitrary compilation of a income statement.

[jimmcg]

See IRS Newswire Issue 2007-142 issued August 7 for furthur clarification.