Individuals who participate in both a 401(k) plan and a 403(b) plan must take into consideration how the 402(g) limit and the 415 annual additions limit are applied. This is illustrated by a question received from one of our clients.

Is it true that a participant can exceed the $41,000.00 limit if he participates in a 401(a) and a 403(b) sponsored by the same not-for-profit employer, so long as the participant is not a more than 50% owner which in a not-for-profit would be the case. Does it matter that the participant involved is the " president " or " director " of the Not-for-Profit ? Even if they can exceed the $41,000.00, wouldn't the individual still be subject to the annual limit on deferrals?

402(g) elective Deferral Limit Issue

Where the individual participates in both a 401(k) and a 403(b), a single annual 402(g) limit applies to the individual. Thus, contributions are coordinated and total salary deferral contributions cannot exceed $13,000 in 2004. However, if the individual is eligible for the $3,000 catch-up contribution in 2004 the total would be $16,000 (assuming the employees is not eligible for the special 403(b) 15 year catch-up, which is explained in the linked article on 403(b) catch-ups). There is a different rule if there is a 403(b)/457 combination. For years after 2002, a deferral to a Section 457(b) plan is not defined as an elective deferral under Section 402(g)(3). Consequently, the Section 457 deferrals are not subtracted from the Section 403(b) elective deferral limit and age 50 catch-up contributions are not coordinated.

415 Annual Limitation Issue

Let's look at the breakdown of the basic rules:

All defined contributions plans maintained by the same employer (including commonly controlled business entities) are treated as one entity for 415(c) annual limitation purposes of the lesser ot 100% of compensation or $41,000 for 2004.

Section 403(b) annuity contracts work differently in that the participant is deemed to maintain the 403(b) and not the actual employer Treas. Reg. 1.415-8(d)(1).

Based on the interpretation that the individual and not the employer is the "owner" of the 403(b) arrangement, it appears that there will be separate 415(c) limits for the 403(b) arrangement and the 401(a) plan with respect to employer contributions. This will not apply with respect to salary reduction and catch-up contributions where a single limit will apply. It also appears that occupation of the position of "president" or "director" of the not-for-profit does not equate with "control" or "ownership" of the not-for-profit.

To illustrate the above points:

If a hospital has a 401(k) and a 403(b), the participants would have a separate annual addition limit. For example, a participant would have an annual additions limit of $41,000 for the 401(k) plan and an annual additions limit of $41,000 for the 403(b) plan. However, as mentioned above, the elective deferral limit is coordinated between the two plans so that the participant may not exceed his or her individual annual elective deferral limit of $13,000 for 2004

An additional nuance

What may be causing confusion is the situation where an individual participates as an employee in a 403(b) maintained by a not-for-profit and also participates in a 401(a) qualified plan maintained by another business. An example of this is where a physician who is employed by a hospital also is engaged in private practice. Assuming that the individual does not have control of the employer contributing to the qualified plan (defined as more than 50% ownership interest in the private practice), the individual will be entitled to separate 415(c) annual additions limits for the 403(b) and the 401(a) plan. Where there is control, there is a single limit as the individual is deemed to "own" both the 403(b) and 401(a) plans.

To further illustrate, a Doctor is employed by the hospital and has no ownership in the hospital and also has his or her own private practice. The Doctor would have one $41,000, 415 limit for the 401(k) in the private practice and another $41,000, 415 limit for the 403(b) plan as an employee of the hospital.