The Internal Revenue Service (IRS) issued an important reminder of the unique application of the limit under Internal Revenue Code (IRC) Section 415(c) to 403(b) plans on August 20, 2021. The IRS’s “Issue Snapshot” highlighted a rule that has applied for decades, but with which 403(b) plan sponsors and administrators are often not familiar.
The total amount that may be contributed to a defined contribution retirement plan on behalf of a participant is limited under IRC Section 415(c) to the lesser of
- the dollar limit for the year at issue ($58,000 in 2021); or
- 100% of the participant’s compensation.
The limit applies to all contributions made to an “employer’s” defined contribution plans in the aggregate. The “employer” includes all members of an employer’s controlled group under IRC Sections 414(b) and 414(c), which generally means all related entities that have common ownership of “more than 50 percent.” See IRC Section 415(h).
Generally, a 403(b) plan participant is considered to have exclusive control over the participant’s 403(b) annuity contract or custodial account. See Treasury Regulation Section 1.451(f)-1(f)(1). Thus, the participant, not the employer sponsoring the plan, is deemed to maintain the annuity contract/custodial account. As a result, contributions and deferrals under the employer’s 403(b) plan on behalf of an employee are not aggregated with contributions made to the employer’s 401(a) qualified plan. Instead, they are aggregated with contributions to other 403(b) and defined contribution plans over which the participant has control. This would include the 403(b) plan of another employer in which the participant may participate or a plan the participant may maintain for themselves for supplemental income generated for work performed outside the employee’s employment with the employer.
For example, a professor at a university participates in the university’s 403(b) plan. In addition, the professor performs consulting services for clients outside his employment with the university, which is fairly typical. If the professor maintains a retirement plan for his consulting business to which the professor makes contributions, contributions and deferrals made on the professor’s behalf under the university’s 403(b) plan must be aggregated with contributions and deferrals made to the defined contribution plan maintained by the professor’s consulting business. If the aggregated contributions and deferrals exceed the IRC Section 415(c) limit, the excess amounts are deemed to be attributed to the university’s 403(b) plan, under Treasury Regulation Section 1.415(g)-1(b)(3)(iv)(C), thereby putting the university’s 403(b) plan at risk.
The IRS expects an employer who maintains a 403(b) plan to have procedures and processes in place to inform employees about the aggregation rule, with notices, forms, or other written communication to participants that describe the rule and require participants to disclose other retirement plans in which they participate. An employer’s failure to inform participants and gather such information from them could lead to the employer’s 403(b) plan inadvertently violating the IRC Section 415(c) limit.
The fact the IRS has published an Issue Snapshot implies that they plan to be more engaged in ensuring that 403(b) plan sponsors are taking responsibility to enforce the IRC Section 415(c) limit in situations where their employees/plan participants are engaged in outside employment.