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Case of the Week: 403(b) Aggregation Rules for Annual Additions

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Massachusetts is representative of a common inquiry involving individuals who participate in both a 403(b) plan and a defined contribution plan, a simplified employee pension (SEP) plan or a savings incentive match plan for employees (SIMPLE) IRA plan. The advisor asked:

One of my clients, who is a doctor, has a 403(b) plan through the hospital and a 401(k) plan that he maintains for his private practice. Is the doctor required to combine his two plans when determining his contribution limit under IRC Sec. 415?

Highlights of Discussion

• In this scenario, yes, the doctor would be required to combine the contributions from the 403(b) plan and those of his 401(k) plan when calculating his maximum contribution under IRC §415(c).
• IRC §415 was added by the ERISA, generally effective for plan years beginning after 1975. IRC 415 establishes limitations on the amount of contributions that may be allocated to and the amount of benefits that may accrue or be paid to any participant under a qualified plan.
• Contribution limitations under IRC §415(c) are applied to DC plans by limiting the amount of employer and employee contributions that may be allocated to an individual's account(s) in all DC plans maintained by the same employer in any one year to the lesser of a specific dollar amount (for 2013, $51,000 for those under 50 and $56,500 for those age over 50), or 100% of the participant's compensation.
• Under IRC §415, a participant generally is considered to exclusively control and maintain his or her own 403(b) plan. Consequently, contributions to a 403(b) plan are not combined or aggregated with contributions to a qualified plan except when a participant controls any employer. (Treas. Reg. §1.415-8(d)(1))
• Consequently, where a participant controls any business (defined as owning more than 50% of the business), the contributions to the 403(b) plan are combined with contributions to the qualified plan of the controlled employer or any affiliated employer. (See Treas. Reg. §1.415-8(d)(2))
• It is important to note that an individual has only one salary deferral limit pursuant to IRC §402(g), regardless of the number of qualified plans in which he or she participates.

Example 1

Jordan is employed by a hospital that is a tax-exempt organization under IRC §501(c)(3). The hospital contributes to a 403(b) plan on behalf of Jordan, and Jordan is also a participant in the hospital's defined contribution plan. Jordan is not required to aggregate contributions under the qualified defined contribution plan with those made under the 403(b) plan for purposes of the limit under IRC §415(c).

Example 2

Jennifer is a doctor who maintains a private practice of which she is a more-than-50% owner. She also works for a tax-exempt hospital, in which she has no ownership interest. Jennifer participates in the 403(b) plan of the hospital and in a 401(k) plan she maintains for her practice. She is required to aggregate contributions under the 401(k) plan with those made under the 403(b) plan for purposes of the limit under IRC §415(c).

Conclusion

Special aggregation rules for purposes of an individual’s annual IRC §415(c) limit must be considered when a person participates in both a 403(b) plan and a defined contribution plan. Investors who find themselves in this scenario should consult their tax advisors regarding their maximum contribution limits. Financial advisors who are familiar with these special aggregation rules are better positioned to support their clients.

(Source: Internal Revenue Manual 4.72.13 — 403(b) Plans)

The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.

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