403(b) Plans - Catch-Up Contributions

 

This issue snapshot discusses catch-up contributions under a 403(b) plan. A 403(b) plan is a retirement plan maintained by a 501(c)(3) organization, minister, or public educational institution. A 403(b) plan may have non-elective contributions (including matching and non-matching contributions) and elective deferrals. Elective deferrals participants make under a 403(b) plan are subject to the annual contribution limits of IRC Sections 402(g) and 415. A participant's elective deferrals are limited to an annual dollar amount ($19,500 for 2020) under IRC Section 402(g).

A 403(b) plan may permit a participant to have increased elective deferrals under:

  • the age 50 catch-up, which also applies to 401(k) and governmental 457(b) plans, and
  • a special catch-up that's unique to 403(b) plans.

IRC Sections and Treas. Regs.

Resources

Analysis

A 403(b) plan that offers elective deferrals must require that they won't exceed the limits under IRC Sections 401(a)(30) and 402(g). See Treas. Reg. 1.403(b)-3(b)(3). Elective deferrals are limited to the "applicable dollar amount" for the taxable year, adjusted for cost-of-living increases. For 2020, the applicable dollar amount is $19,500. See IRC Sections 402(g)(1)(B) and 402(g)(4) and Cost-of-Living Adjusted Limits chart.

A 403(b) plan may also permit participants to make additional elective deferrals under the age 50 catch-up in IRC Section 414(v) and the special 403(b) catch-up in IRC 402(g)(3).

Age 50 Catch-Up

403(b) plans may allow participants who are age 50 and older during the tax year to may make additional elective deferrals of up to $5,000, adjusted for cost-of-living increases. For 2020, the age 50 catch-up limit is $6,500. See Treas. Reg. 1.403(b)-4(c)(2) and IRC Section 414(v)(2)(C). Under the age 50 catch-up, a 403(b) participant who is age 50 or older during the 2020 taxable year could make elective deferrals of $26,000 ($19,500 + $6,500), assuming that the $26,000 amount is below the 100% of the participant's compensation as limited under IRC Section 415(c)(1)(B).

Special 403(b) Catch-Up

Amount

Under the special 403(b) catch-up, employees of a qualified organization may contribute an increased dollar amount under IRC Section 402(g)(1) if they've completed at least 15 years of service with the organization. This special 403(b) catch-up is the least of:

  1. $3,000;
  2. $15,000, reduced by the sum of:
    • amounts not included in gross income for prior taxable years by reason of this special 403(b) catch-up and
    • the aggregate amount of designated Roth contributions (per IRC Section 402A(c)) permitted for prior taxable years by reason of this special 403(b) catch-up; or
  3. $5,000 multiplied by the employee's years of service with the qualified employer, less all elective deferrals the employee made in prior years to the organization's plans. Elective deferrals include those made to a 401(k) plan, SARSEP, SIMPLE, or 403(b) plan maintained by the organization.

Under paragraph (B) above, the special 403(b) catch-up formula imposes a lifetime limit of $15,000 of elective deferrals.

See IRC Sections 402(g)(3) and 402(g)(7) and Treas. Reg. 1.403(b)-4(c)(3).

Qualified Organization

Only a 403(b) plan that's maintained by a qualified organization may allow increased elective deferrals under the special 403(b) catch-up. A qualified organization is any of the following:

  1. An educational organization as described in IRC Section 170(b)(1)(A)(ii)
  2. A hospital
  3. A health and welfare service agency (including a home health service agency)
  4. A church
  5. A church-related organization, as defined under IRC Section 414(e)(3)(A)
  6. An organization described in IRC Section 414(e)(3)(B)(ii) (an exempt organization that is controlled by or associated with a church or convention or association of churches).

All entities within a church-related organization or one controlled by a church-related organization under IRC Section 414(e)(3)(B)(ii) are treated as a single qualified organization. This means that you must consider all of a participant's years of service and prior special 403(b) catch-up deferrals for all related organizations to determine if a participant is eligible for, and if so, his annual limit on special 403(b) catch-up deferrals.

A 'health and welfare service agency' means an organization whose primary activity is to provide medical care as defined in IRC Section 213(d)(1), a 501(c)(3) organization whose primary activity is the prevention of cruelty to individuals or animals, an adoption agency, or an agency that provides personal services to the needy.

Years of Service

Under the special 403(b) catch-up, an employee must have completed at least 15 years of service with the qualified organization sponsoring the plan. Years of service are based on an employee's work period, which may be different from the taxable year. For example, a teacher's work period is the academic year, which may run from August to June. Credit an employee who works full-time during the entire work period with a full year of service. Credit an employee who only works part of the work period, either full-time or part-time, with a fraction of a year. Add an employee's work periods together to determine if the employee has completed 15 years of service. See Treas. Reg. 1.403(b)-4(e).

When determining if an employee has 15 years of service, only consider the years worked with the same organization. For example, you wouldn't consider an employee's work for different schools within the same school district as work for the same organization; therefore, you wouldn't combine years of service with the different schools to determine if the employee has 15 years of service. However, there's an exception to this rule for church- related organizations or organizations controlled by a church-related organization. See Treas. Reg. 1.403(b)-4(e)(3)(ii)(B).

A 403(b) plan that permits the special 403(b) catch-up must keep detailed records. The plan must keep participant information for the increased limit formula, including a participant's:

  • elective deferrals made to any of the organization's plans,
  • prior elective deferrals under the special 403(b) catch-up, and
  • designated Roth contributions.

The plan must also keep employment records to calculate an employee's years of service.

Coordination Rule

If the plan permits both the age 50 catch-up and the special 403(b) catch-ups, you must consider the special 403(b) catch-up first to apply the annual limit. Then, apply the age 50 catch-up to any remaining amount, up to the IRC Section 414(v) limit. For example, a participant eligible for both the age 50 catch-up and $3,000 of the special 403(b) catch-up makes an additional $7,000 in catch-up contributions during 2019. $3,000 of the $7,000 is applied to the special 403(b) catch-up and the remaining $4,000 is applied to the age 50 catch-up. See Treas. Reg. 1.403(b)-4(c)(3)(iv).

Audit Tips

  • Review the Forms W-2 to determine if any employee has exceeded the basic IRC Section 402(g) limit. This indicates that the employee made catch-up contributions.
  • Determine if the plan document permits the age 50 catch-up or the special 403(b) catch-up contributions. For plans that permit both types, make sure the contributions are applied to the limits in the proper order.
  • Verify that the qualified organization keeps the records necessary to calculate the special 403(b) catch-up and that the calculations are accurate.