Issue Snapshot - 403(b) Plan – Plan Aggregation in Determining Compliance with IRC Section 415(c)

IRC Sections and Treas. Regulations

Other Resources

Analysis

IRC Section 403(b)(1) provides an exclusion from gross income for amounts contributed to the purchase of a 403(b) annuity contract if certain requirements are satisfied. For this snapshot, one of these is the requirement that the contributions and other additions to the contract do not exceed the limitations under IRC Section 415(c). See Treas. Reg. Sections 1.403(b)-3(a)(9) and 1.403(b)-4(b).

IRC Section 415(c) Limitation

IRC Section 415(c) generally limits annual additions to the lesser of the dollar limit in effect for the year, as adjusted for cost–of-living increases, or 100 percent of a participant’s compensation. The dollar limit in effect for a year is set via an annual notice that adjusts cost‑of‑living dollar limitations for pension plans and other retirement-related items. The annual notice for tax year 2017 was issued in Notice 2016-62. Contributions made to all defined contribution plans of the employer are combined in applying the limitation under IRC Section 415(c).  See IRC Section 415(f). “Employer” is defined in terms of the controlled group under IRC Sections 414(b) and 414(c), as modified by IRC Section 415(h).  IRC Section 415(h) provides a “more than 50 percent” test in determining control under IRC Sections 414(b) and 414(c).

Aggregation Rule for 403(b) Plans

Generally, 403(b) participants are each considered to have exclusive, control over their own annuity contract. See Treas. Reg. Section 1.415(f)-1(f)(1). Because the participant is considered to control and maintain the annuity contract, contributions to the 403(b) annuity contract are generally not aggregated with contributions to any other defined contribution plan qualified under IRC Section 401(a).

An exception to this rule, however, is that a participant’s 403(b) annuity contract will be aggregated with one or more defined contributions plans where that particular participant is deemed to control the employer sponsoring the defined contribution plan qualified under IRC Section 401(a). See IRC Section 415(k)(4). 

IRC Section 415(c) Testing for Aggregated Plans

If a 403(b) annuity contract is aggregated with a defined contribution plan qualified under IRC Section 401 (the sponsor of which is controlled by the 403(b) annuity holder), then both plans must satisfy the IRC Section 415(c) limitation separately and also on an aggregate basis.

  • When a participant controls an employer, the limitation year is the limitation year of the controlled employer. See Treas. Reg. Section1.415(j)-1(e). 
  • Both non-elective and elective contributions are included in testing under IRC Section 415(c). However, catch up contributions under IRC Section 414(v) (Age 50 Catch Up) are disregarded in applying IRC Section 415(c). 
  • Compensation used to determine the IRC Section 415 limit is a participant’s “includible compensation” as defined in Treas. Reg. Section1.403(b)-2(b)(11). 
  • Amounts contributed in excess of the IRC Section 415(c) limitation are attributed to the 403(b) plan. See Treas. Reg. Section 1.415(g)-1(b)(3)(iv)(C). 

Example

The following example illustrates the application of IRC Section 415(c) when a 403(b) annuity contract is aggregated with a defined contribution plan.  

University X provides a 403(b) plan covering all employees. The 403(b) plan provides that an employee may elect to defer up to the lesser of the IRC Section 402(g) dollar limit or the IRC Section 415(c) limit and, if applicable, may use the Age 50 Catch Up under IRC Section 414(v) and the special catch up limit under IRC Section 402(g)(7) for long-term employees. The 403(b) plan also provides for non-elective employer contributions to employees who satisfy the eligibility requirements for such contributions. 

A number of professors, including Professor Y, have been found to control their own separate businesses. Each professor’s business sponsors a defined contribution plan to which contributions on behalf of the professor have been made.

For 2016, Professor Y elected to defer up to the maximum 403(b) dollar amount of $18,000 and to use the Age 50 Catch Up equal to $6,000. Because Professor Y has only five years of service with University X, she does not qualify for the special catch up limit under IRC Section 402(g)(7). 

University X also made a non-elective employer contribution of $35,000 to the 403(b) plan on behalf of Professor Y for the 2016 year. In 2016, Professor Y contributed $24,000 to Plan Z, a defined contribution plan sponsored by her consulting business that she controls. Plan Z’s limitation year is the calendar year. Professor Y’s includible compensation from University X is $100,000. Professor Y’s compensation from her consulting business is $80,000 for the 2016 year.

The 403(b) contribution limits in effect for 2016 are as follows:

IRC Section 402(g) Elective Deferral Limit $18,000
IRC Section 414(v) Age 50 Catch Up $6,000
IRC Section 415(c) Limit $53,000

The Age 50 Catch Up is not counted toward the IRC Section 415(c) limit.  The total elective and non-elective contributions to the 403(b) annuity contract for 415(c) purposes equal $53,000 ($35,000 + $18,000). Thus, the contributions to Professor Y’s 403(b) annuity contract do not exceed the IRC Section 415(c) limitation when tested separately from those made to Plan Z. 

Because Professor Y controls the employer that maintains Plan Z, the IRC Section 415(c) limit also applies on an aggregated basis. The combined contributions to Plan Z and the 403(b) plan exceed the IRC Section 415(c) limit by $24,000. The excess annual addition is attributable to the 403(b) annuity contract.

Issue Indicators or Audit Tips

  • This issue is frequently found during examinations of 403(b) plans maintained by governmental and tax exempt healthcare entities and colleges/universities. This is because many of the healthcare doctors and the university professors maintain a practice outside of the entity that is the general 403(b) plan sponsor. 
  • Review the plan documents and Summary Plan Description to determine the types of contributions provided under the plan.
  • Review the plan language for compliance with IRC Section 415(c).
  • As part of reviewing the employer’s internal controls, determine the employer’s policy regarding outside employment.
  • If outside employment is not permitted, the agent may consider plan aggregation a low audit risk. 
  • If the employer is silent about or permits outside employment, determine the procedures used to inform employees about the aggregation rule, and review any notices, forms, or other written communications containing that information.
  • Review any information employees must provide to the employer regarding outside employment and plan contributions.