Enforcing Plan Limits for 403(b)s Not So Simple

There are unique rules for 403(b) plans that make enforcing contribution and benefit limits not so straightforward.

The Internal Revenue Service (IRS) recently announced cost of living adjustments affecting dollar limitations for retirement plans, which included an increase in the elective deferral limit to $18,000 for 2015 and an increase in the age-50 catch up deferral participants are allowed to make to $6,000 for 2015. But for 403(b) plans, according to Susan Diehl, president of PenServ Plan Services, participants are also allowed a special catch up contribution in addition to the age-50 catch up: the 15-years-of-service catch up.

The 15-years-of-service (YOS) catch up is not subject to cost of living adjustments. It is limited to the lessor of:

  • $3000;
  • $15,000 minus prior 15 YOS catch up contributions; or
  • ($5,000 X YOS) minus prior elective deferrals (excluding age-50 catch ups).

Catch up contributions made by participants are considered 15 YOS catch ups first, up to the limit, then categorized as age-50 catch ups, Diehl told attendees of the 2014 Association of Pension Professionals and Actuaries (ASPPA) Annual Conference.

Ed Salyers, a certified public accountant (CPA) with his own practice, and former senior tax specialist with the Tax Exempt and Governmental Entities Division of the IRS, told attendees that they should keep all records of participant contributions indefinitely to defend against the IRS because the agency only keeps employee W-2s for 10 years.

There are also different rules for 403(b) plans for Employee Retirement Income Security Act (ERISA) Section 415 limits on the amount of additions that may be made to participants’ retirement accounts. Specifically, for calculating 415 limits, the 403(b) is not aggregated with another defined contribution (DC) plan offered by the sponsoring employers. So, for example, if a hospital offers both a 401(k) and 403(b) plan for its employees, they must aggregate employee deferrals in the two plans for the individual employee deferral limit, but not for the 415 plan additions limit, Diehl said. Also, if a hospital offers a 401(a) plan to which 403(b) matching contributions are made, it does not have to aggregate the two plans for the 415 limit.

An exception is when the plan participant contributes to another DC plan offered by an employer it controls. For example, Diehl said, a doctor may contribute to a 403(b) plan offered by a hospital to which he is affiliated, but may also have a private practice for which he sponsors a retirement plan. In that case, the 403(b) additions must be aggregated with the DC plan the doctor sponsors, to calculate 415 limits. According to Diehl, if there is an excess to the 415 limit, it always has to be corrected in the 403(b) plan.

Another unique provision of 403(b)s Diehl pointed out is the ability to make contributions on behalf of employees that have separated from service for up to five years after separation. For example, schools sometimes use this provision to put accrued, unused vacation pay into the plan for separate participants rather than pay them. These contributions are considered employer non-elective contributions and may not exceed 415 limits.

Finally, Diehl pointed out that non-profit employers must think differently about what entities would make a controlled group for purposes of aggregating plans sponsored by different employers. There are no owners in non-profits, so they must look at the similarity of their boards of directors. Also, if one entity’s board has the authority to name 80% of another entity’s board, the two entities are part of a controlled group. Ronald J. Triche, associate general counsel and director of Government Affairs for ASPPA, moderator of the conference discussion, added that if two entities that share a budget, training or people may elect to be a controlled group.

Salyers noted that 457 plans also have unique provisions. For the individual deferral limit, employer contributions are also counted, so for 2015, the total of both employee and employer contributions cannot exceed $18,000. However, 457 plans provide for an additional catch up contribution of the lesser of twice the basic dollar limit or underutilized amounts. For 415 limits, 457 plan additions are only aggregated with additions to another 457 plan offered by the same employer. Salyers pointed out there is no formal IRS correction for excess contributions, so 457 plan sponsors “must get it right.”