Chapter 5 — Contributions

Most TSAs are funded exclusively through employee elective deferrals — typically through a salary reduction agreement. However, employers may also make non-elective contributions on behalf of employees, and employees may make voluntary after-tax contributions. TSA contributions may consist of some or all of the following:

• Elective deferrals — amounts the employee elects to defer from salary into the TSA (pre-tax).
• Non-elective contributions — employer contributions made regardless of whether the employee defers; subject to nondiscrimination rules.
• Voluntary contributions — additional after-tax employee contributions beyond the salary reduction amount.

Contributions within the applicable limits are excluded from the participant’s taxable income. Contributions exceeding those limits are taxable as ordinary income in the year contributed (or as they vest, for non-immediately vested amounts).

Two limits govern TSA contributions — the same two that apply to 401(k) plans (a third limit, the “exclusion allowance,” was permanently repealed beginning in 2002):

TSAs are defined contribution plans, subject to the DC annual additions limit. Total additions from all sources — elective deferrals, non-elective contributions, and voluntary contributions — may not exceed the lesser of:

• $72,000 (2026), or
• 100% of the participant’s compensation.

This overall limit applies to contributions to all defined contribution plans offered by the employer combined — not just the TSA. If a participant is covered by both a TSA and another DC plan, the $72,000 / 100% cap applies to the aggregate.

Employee elective deferrals are also subject to a separate annual dollar ceiling. For 2026, the limit is $24,500. This ceiling applies to all elective deferrals across all plans — including other TSAs, 401(k) plans, SARSEPs, and SIMPLE plans. If a TSA participant also defers into any of these other plans, the combined deferrals may not exceed $24,500.

TSAs offer a unique additional catch-up provision not available to 401(k) or SIMPLE plans. An employee with 15 or more years of service with a qualifying organization may increase their elective deferral limit. Qualifying organizations include:

• hospitals,
• educational organizations,
• home health care service agencies,
• health and welfare service agencies, and
• religious organizations.

The annual increase to the elective deferral limit is the smallest of:

• $3,000,
• ($5,000 × years of service) minus total prior elective deferrals to the plan, or
• $15,000 minus the total of all prior-year increases used under this rule.

The lifetime maximum benefit from the 15-year catch-up is $15,000. This catch-up is applied before the standard age-50+ catch-up when computing total allowable deferrals.

Prior to 2002, a third limit called the exclusion allowance also capped TSA contributions. It was calculated as:

(Includable Compensation × 20% × Years of Service) − Prior Excluded Contributions

The exclusion allowance was permanently repealed beginning in tax year 2002. The two remaining limits — the overall DC limit and the elective deferral limit — now govern TSA contributions exclusively.

Exam questions may still reference the exclusion allowance in a historical context. The formula above is provided for background understanding only.

Contributions that fall within the allowable limits are excluded from the participant’s current taxable income and will be taxed as ordinary income upon withdrawal at retirement.

Contributions that exceed the applicable limits are handled differently depending on the type of excess:

• Excess total additions to a custodial (mutual fund) account are subject to a 6% excise tax each year the excess remains in the plan. This penalty does not apply to excess contributions used to purchase annuity contract premiums.
• Excess elective deferrals (amounts above the $24,500 limit) are subject to double taxation: the excess is taxed as ordinary income in the year of the contribution, and the IRS does not include the excess in the participant’s cost basis in the plan. As a result, the same dollars are taxed again when distributed — effectively imposing a double tax penalty on over-deferrals.

For contributions that are immediately vested (such as elective deferrals), any excess is taxed in the year contributed. For contributions subject to a vesting schedule, excess amounts become taxable as they vest.

Unlike most other qualified plans — which allow contributions up to the tax filing deadline (typically April 15 for individuals, or later with extension) — TSA contributions must be made by the end of the employee’s tax year (December 31 for calendar-year taxpayers). This is an important and frequently tested distinction.

The employment tax treatment of TSA contributions follows the same rule as SARSEPs:

• Employee elective deferrals — FICA (Social Security and Medicare) and FUTA (federal unemployment) taxes must be withheld, because the deferrals originate from the employee’s wages.
• Employer non-elective contributions — FICA and FUTA are not withheld, because these originate from the employer’s own funds rather than employee wages.