|Mistake||Find the Mistake||Fix the Mistake||Avoid the Mistake|
5) Your 403(b) plan doesn’t limit the total employer and employee contributions to not exceed the IRC Section 415(c) limits.
Determine types of contributions allowed in the plan and total employee and employer contributions per participant. Compare with the current year’s dollar limit.
|Transfer excess to a separate 403(c) account or distribute to the affected participants.||Understand that it’s the employer’s responsibility to limit contributions and issue correct W-2s. With vendors, establish procedures to limit contributions. Educate employees. Conduct year-end review of employer and employee contributions and compare with current legal limits.|
403(b) plans are subject to several contribution limits. A plan that includes employer and employee after- tax contributions, as well as employee elective deferrals is subject to limits under both IRC Sections 402(g) (discussed in Mistake #7) and 415(c).
- Employee elective deferrals may not exceed the 402(g) limits
- Total employer contributions, employee after-tax contributions and employee elective deferrals may not exceed the limits under 415(c). The total employer and employee contributions (including the 15-year catch-up discussed in Mistake #6) cannot exceed the lesser of $55,000 or 100% of includible compensation in 2018 ($54,000 in 2017, and $53,000 in 2015 and 2016). The dollar limitation is increased by cost-of-living adjustments in later years.
- Special 15-year catch-up are included in this 415 limitation.
- Age 50 catch-up contributions are excluded from the 415 calculation.
How to find the mistake
First, you’ll need to determine what types of contributions are allowed to the 403(b) plan. For a plan that only allows employee elective deferral contributions:
- Review the elective deferral amounts for each participant.
- Determine if the total elective deferrals made by each participant exceeds the lesser of:
- The limit under 402(g) ($18,500 in 2018; and $18,000 in 2015, 2016, and 2017),
- 100% of their compensation.
- The limit under 402(g) ($18,500 in 2018; and $18,000 in 2015, 2016, and 2017),
Note that even including catch-up contributions, elective deferral amounts can never exceed 100% of an employee’s compensation.
If a plan includes employee elective deferrals and employer contributions, the 415(c) limit calculation becomes more complicated:
- Contributions for each participant may not exceed the 415(c) limitations (lesser of $55,000 in 2018; $54,000 in 2017; and $53,000 in 2015 and 2016) or 100% of the participant’s compensation).
- For each participant, determine the total of all contributions made to the plan, including employee elective deferrals, employee after-tax, matching and other employer contributions.
- Make a list of each employee with the employee’s compensation, employee contributions and employer contributions.
- If any employee’s total employee and employer contributions (excluding age 50 catch-up) has exceeded 100% of the employee’s compensation or $55,000, you may have a mistake that must be corrected.
Pat, age 50, who has worked as a teacher in the ABC School District for 15 years, is newly eligible for the 15-years-of-service catch-up benefit and has eligible compensation of $70,000 for 2015. Pat is eligible for ABC’s 403(b) plan. What are Pat’s maximum employee and employer contributions for 2015?
- Pat’s 415(c) limit for 2015 is the lesser of 100% of his includible compensation or $53,000 (the 415(c) dollar limitation for 2015).
- Pat’s maximum employee elective deferrals are $27,000 ($18,000 (2015 402(g) limit) + $3,000 (15-years-of-service catch-up) + $6,000 (2015 age 50 catch-up)).
- If the above maximum employee contributions are made then the maximum employer contribution is $32,000.
- The maximum employer contribution figure is calculated by starting with the 415(c) limitation - the lesser of 100% of compensation ($70,000) or $53,000. Subtract the total elective deferrals, excluding the age 50 catch-up contributions ($27,000 – 6,000), which equals $21,000. Accordingly, $53,000 - $21,000 = $32,000.
- Contribution limits under a 457(b) plan are determined separately from 402(g) and 415. If ABC offered a 457(b) plan to its employees for 2015, Pat could defer an additional $18,000 to the 457(b) without exceeding the limits.
How to fix the mistake
Correction of a mistake to limit contributions to the 415(c) limit requires that the excess amount, adjusted for earnings, either be transferred to a separate account that complies with IRC Section 403(c), or be distributed to the participant by the end of the year in which the excess occurred. In either case, the excess is includable in the participant’s gross income (to the extent the amount is nonforfeitable).
Charity X sponsors a 403(b) plan for its employees. Currently, 75 employees are eligible plan participants. The total current value of annuity contracts, and or, custodial accounts associated with the plan is less than $500,000. The plan allows both employee elective deferrals and employer contributions. The 403(b) plan allows for elective deferrals to be deposited into a special after-tax Roth account. For the 2015 year, Tom exceeded the 415 limits.
Tom’s 415 limit is based on the following:
- Compensation = $70,000
- Pretax elective deferral = $17,000
- After-tax Roth elective deferral = $500
- Nonelective employer contribution = $36,500
415 Calculation based on 2015 limits:
Tom’s total contributions ($17,000 + 500 + 36,500) = $54,000
Tom’s 415(c) limit (Lesser of $70,000 or $53,000 (2015 dollar limitation)) = $53,000
Tom’s 415 excess = $1,000
If the excess is neither transferred to a separate 403(c) account, nor distributed to the participant by the end of the year in which the excess occurred, the error can be corrected under EPCRS.
School District Y sponsors a 403(b) plan for its employees. Currently, the number of current and former plan participants is 275. The total current value of annuity contracts, and or, custodial accounts associated with the plan is over $500,000 but less than ten million dollars. The plan provides nonelective employer contributions, matching contributions and elective deferrals. Matching contributions are equal to 100% of elective deferrals up to 15%. For the 2015 year, two participants exceeded the limits under IRC 415(c). Tuttle had 415 compensation of $80,000 and Ursula had 415 compensation of $40,000.
|Elective deferrals||$ 18,000||$ 18,000|
|Matching contributions||$12,000||$ 6,000|
|Nonelective employer contributions||$ 25,000||$ 18,000|
|Total contributions||$55,000||$ 42,000|
|415(c) limit, 100% of compensation or $52,000||$53,000||$ 40,000|
|415(c) excess||$ 2,000||$ 2,000|
Because the excess wasn’t transferred to a separate 403(c) account or distributed to the participant by the end of the year in which the excess occurred, the error can be corrected under EPCRS.
Correction programs available
Charity X and School District Y may correct their mistakes in 2016 under SCP if they determine they have the proper practices and procedures in place to operate a compliant plan and the mistake is insignificant.
Charity X uses Revenue Procedure 2016-51 to distribute $2,000 to Tom. The ordering of the distributions is based on Revenue Procedure 2016-51 section 6.06 and the safe harbor example in Appendix A.08. Therefore:
- Distribute $1,000 adjusted for earnings from Tom’s Roth account.
- Distribute $1,000 adjusted for earnings from Tom’s pre-tax elective deferral account.
School District Y uses Revenue Procedure 2016-51 to return the excess of $2,000 to Tuttle, based on the ordering in section 6.06 and the safe harbor example in Appendix A section .08. Therefore, $2,000, adjusted for earnings, is distributed from Tuttle’s elective deferral account. Correction of Ursula’s $2,000 415 excess will require this amount to be distributed to Ursula from her elective deferral account, adjusted for earnings.
In addition, School District Y and Charity X must change their administrative procedures to ensure that 415 excesses don’t occur in future years.
Voluntary Correction Program:
If they (including their 403B plans) are not under audit, Charity X and School Distrust Y may choose to correct their mistake under VCP by making a 2018 submission based on Revenue Procedure 2016-51.
The user fee for Charity X’s VCP submission in Example 1, based on the current value of assets associated with the 403(b) plan, is $1,500. VCP user fees may change in subsequent years.
The user fee for School District Y’s VCP submission in Example 2, based on the current value of assets associated with the 403(b) plan, is $3,000. VCP user fees may change in subsequent years.
Audit Closing Agreement Program:
Under Audit CAP, correction is the same as described above. Charity X or School District Y and the IRS enter into a closing agreement outlining the corrective action and negotiate a sanction that is not excessive, considers facts and circumstances; bear a reasonable relationship to the nature, extent and severity of the failures, based upon all relevant factors described in section 14 of Rev. Proc. 2016-51.
How to avoid the mistake
The employer has responsibility for making certain the plan contributions don’t exceed the 415(c) limits and must work with its 403(b) vendors to limit the total contributions provided to each plan participant. If the employer knows how much the participant deferred, the employer can make a calculation to keep the total employee and employer contributions within the 415 limits. Tracking this mistake may be as simple as listing plan participants, together with their compensation, all deferrals to all plans of the employer and all employer contributions. Compare the total deferrals and employer contributions to the participant’s compensation and the 415 limit for that year.