Employees can save on a tax-advantaged basis through voluntary salary-reduction contributions. Under the law employees can have more than one salary reduction agreement in a calendar year, but your plan may limit the number of agreements employees may enter into.

• What is the basic limit on elective deferrals?
• What happens if an employee contributes too much?

The most an employee can tax-defer is governed by sections 415 and 402(g) of the Internal Revenue Code.

Insurance carriers and mutual funds must make sure that 403(b) and 401(k) elective deferrals don't exceed the section 402(g) limit, which is $15,500 for 2007. For employees with at least 15 years of service at an eligible institution, deferrals of up to $18,500 may be possible. Deferral limits lower than $18,500 may be mandated for some employees by sections 415 of the Internal Revenue Code; insurance carriers don't have to monitor this limit.

Certain employee contributions aren't considered elective deferrals and don't count toward the 402(g) limit, so long as they are:

• Mandatory as a condition of employment and the condition is enforced by the institutions); or
• Made under a one-time, irrevocable salary reduction agreement at the time the employee initially becomes eligible to participate in any plan of the institution.
• After-tax employee contributions.

For the 2007 plan year, the section 415 limit, which applies to both employer and employee contributions, is the lesser of $45,000 or 100% of the employee's compensation.

Employees of eligible institutions may also be able to use the 15-year rule calculation to tax-defer more of their salary than would be possible under the 402(g) limit.

The 15-year rule may allow employees of eligible institutions to exceed the 402(g) limit if they have at least 15 years of service with an eligible employer. Eligible employers include teaching institutions, hospitals, churches, home health care organizations, and health and welfare service agencies.

Additional contributions under the 15-year rule cannot exceed $3,000 per year above the maximum allowed under the general or alternative limit, up to a $15,000 lifetime cap.

Employees age 50 and over are eligible to make so-called "catch-up" contributions in addition to those permitted by section 402(g). It doesn't matter whether the employee contributions in prior years were less than the amounts permitted by section 402(g) in those years. The limit on catch-up contributions is $5,000 in 2007.

An employee age 50 or over who is also eligible for the 15-year rule may be able to contribute up to $23,500 in 2007 ($15,500 under 402(g), $3,000 under the 15-year rule, and another $5,000 catch-up contributions.).

Ordinarily, employees whose elective deferrals exceed the 402(g) limit must report the excess as income on their tax return forms for the calendar year the deferral was made and as well as on their tax returns for the calendar year when the excess amounts are withdrawn. The only way they can correct the mistake and avoid double taxation is to have the excess amount, plus earnings, refunded to them by the tax-filing deadline for the year in which the contributions were made, for example, by April 15, 2007, for excess contributions made during calendar 2006. In that case, the excess contribution need only be reported as taxable income for the year the contribution was made. Refunded earnings attributable to an excess deferral must also be reported as income; losses attributable to an excess deferral can reduce reported income in the refund year.

When an excess deferral occurs, TIAA-CREF will usually issue two 1099-Rs. One reports the excess amount, which must be entered in the employee's tax return for the year the deferral was made. The other reports earnings amount, which must also be included on the tax return for the year the earnings are refunded. Employees do not need to attach 1099-Rs with their returns, because there is no income tax withholding on a refund. When employees incur a loss, we will send a letter stating the amount, which should be reported on the "other income" line of Form 1040. The letter also tells employees to describe the loss as one "attributable to a refund of excess deferrals," and to bracket the amount to flag it as a loss. Employees who file their tax returns before receiving their 1009-Rs must file amended tax returns to include the excess deferrals.

The foregoing covers only the federal income tax consequences of excess deferrals. Employees should consult taxing authorities or their own attorneys or financial advisors concerning state and local income tax requirements. To help plan administrators monitor employees' compliance with the 402(g) limit, TIAA-CREF conducts a year-end review. If any employees at your institution have exceeded the 402(g) limit, you'll get a letter from us, usually by mid-January following the close of the year in question.

• Read Understanding Minimum Distribution...Making Your Decision With TIAA-CREF • Read TIAA-CREF Group SRA Loans • Read TIAA-CREF Retirement Plan Loans		• Read Pension Primer: Comparing 403(b) and Qualified Plans • Read Pension Primer: The Hows and Whys of Replacing a Defined Benefit Plan • Read Pension Primer: Keoghs: Retirement Plans for Self-Employed Income