The primary purpose of a deferred income plan is to allow you to postpone receipt of a portion of your current income until after you retire. The amount of current earnings deferred will not be considered as income for federal income tax purposes until you actually receive the income, usually after retirement when you may be in a lower tax bracket.  At that time, it will be taxed as ordinary income.

By deferring payment of income taxes until you receive the value of your account as a retirement benefit, you can invest more of your current earnings for retirement.  By so doing, you may reduce the total amount of income taxes paid during your lifetime and thereby accumulate a larger sum for retirement than would have been possible had you invested after-tax dollars.

By comparing the differences between independent after-tax savings plans and deferred income plans, you can see the substantial advantages of investing through a deferred income plan.

In a deferred income plan, all of the dollars you defer will be invested, and you do not pay income taxes on those amounts at the time of deferral. Income taxes on the amounts invested and on any earnings on your investments are deferred until you actually receive the money–presumably after retirement, when you may be in a lower tax bracket.

The examples below and on the following page show how deferred income can add to savings and investment, especially when measured over the long term.

Net Result of $100 in Take-Home Pay (28% Tax Bracket and 8% Interest Rate).

Personal Savings Deferred Income
Amount Invested $100 $139
Yearly Investment $1,200 $1,668
After 10 Years $18,295 $25,430
After 20 Years $58,902 $81,866
The University offers three deferred income plans.  These plans are defined in Sections 401(k), 403(b), and 457 of the Internal Revenue Code.  The features of the three plans differ, and the attractiveness of each plan depends upon individual circumstances.  A comparison of the features of the three plans is provided in the handout in the deferred income packet.

The University serves only as an intermediary to enable faculty and staff to defer a portion of their current pre-tax income through a series of routinely scheduled salary reductions.  There are many companies which are authorized to write deferred income contracts for UT employees.

The University does not endorse a specific company or plan.  Enrollment in these plans is purely voluntary, and the decision to participate resides solely with the individual.  If the decision is made to participate, the employee is responsible for choosing a company with which to contract.  The employee will then enter into a contractual agreement with the company of choice and will be bound by the provisions of that contract.

All employees of the University are eligible to enroll in one or more of the UT Deferred Income Plans.
Yes, you may participate in the Deferred Compensation Plans as long as you are an active employee unlike IRA plans that have the age limit of 70 1/2.
As an active employee you are not required to begin the IRS Required Minimum Distribution for any funds in a Deferred Compensation Plan of the University of Tennessee’s.  You will be required to take a minimum distribution for any funds in plans not belonging to the university.

You should consider enrolling in a deferred income plan if:

• you now have and will continue to have funds available for emergencies,
• you are currently investing on an after-tax basis,
• you are paying substantial amounts of income tax,
• yours is a dual-income family,
• you are single with no dependents, or
• you are approaching retirement.

These plans are designed as a means to accumulate funds for retirement.  They are not intended to serve as short-term savings accounts. You probably should not participate if:

• you have not first provided funds for emergencies, or
• you cannot afford to invest part of your earnings on a long-term basis

You may contact your personnel office, business office, or the Office of Retirement Services for more information relative to enrollment in any or all of UT’s deferred income plans.  A list of the campus representatives is provided in your TDI packet.
You may begin or cancel your tax deferral at any time during the year.
You may enroll in any of the deferred income plans at any time.
The 401k plan will allow a minimum of $20.00 per month.  Most 403(b) companies will allow a minimum deferral of $25 per month.  The maximum amount you can defer is determined by personal factors which must be calculated on an individual basis.The combined total contribution to the 401k and/or 403b plans cannot exceed the Internal Revenue Service limit set for individual plans — that is, $17,500 for under age 50 and $23,000 for over age 50, per year.  The 457 plan will allow you to defer an additional  $17,500 for under age 50 and $23,000 for over age 50, per year in addition to two catch-up options.
Yes, you may terminate your salary reductions so that you are no longer deferring any of your earnings.  Following termination of your income reductions, your compensation will be restored to its former level.  The amount that has already accumulated in your deferred income account will continue to accumulate investment earnings.

Normally, funds invested in a 401(k) and 403(b) plan may be distributed when one of the following events occurs:

  1. Death (payment is made to your beneficiary),
  2. Retirement (normal, early, or late),
  3. Termination of employment,
  4. Disability,
  5. Attainment of age 59 1/2, or
  6. 401(k) Financial hardship (subject to administrative approval).

Again, these are the events which normally must occur before the funds in your 401(k) and 403(b) deferred income accounts may be withdrawn.  However, the specific rules which govern payout or withdrawal of your accumulations vary by the type of plan in which you are enrolled and the specific provisions in your plan contract.

Employee deferrals invested in a 457 plan may be distributed upon death, disability, separation from service, or financial hardship.

“Financial hardship” is generally viewed as the occurrence of an unforeseeable emergency.   The determination of whether a particular occurrence constitutes a financial hardship under these plans is made by a committee appointed by the UT Vice President for Business and Finance and Security First Investors.
Interest and dividends are credited to your accumulation account and are not subject to federal income tax until they are received as income benefits or withdrawn from your account.
There is no effect on retirement or Social Security programs, since amounts deferred will continue to be used in calculating contributions and benefits for those systems.  Your University retirement program is entirely separate.
Your W-2 form reflects the amount of salary that is considered compensation for tax purposes.  It will not reflect income deferred by you except as a notation.
After termination of your employment, the value of your deferred income account may be paid to you as specified in your contract.  Income taxes become due for the tax year in which you receive the money, and you may have to pay federal tax penalties. However, distribution of your account need not necessarily occur immediately following termination of your employment.  For example, monies which have accumulated in your account may be left until such future date as you select, but the distribution must begin by April 1 following the calendar year in which you attain age 70 1/2 or retire, whichever occurs later.  Those funds which remain in your account will continue to accrue earnings on a tax-deferred basis.