No age 50 requirement is applicable to this special catch-up. However, if you are age 50 or over, there is a coordination of the two types of catch-up that must be carefully done.

Coordination of the Two Types of Catch-up Contributions (15 Years of Service Catch-up (402(g)(8)) and the EGTRRA Catch-up 414(v))

Now that there are two types of catch-up, there are also rules for how they are to interact. Specifically, the $3,000 is to be used first. If this is not understood in advance, the 414(v) catch-up could be lost. If a participant is over age 50 and has over 15 years and has not yet used the catch-up due to the 15 years of service, the 15 year catch-up must be used first.

For example, if an individual over age 50 with 15 years of service made elective deferral contribution of $17,000. The first $15,000 would exhaust the 402(g) limit. However, the $2,000 above the 402(g) limit would be considered a catch-up towards 15 years of service $15,000 catch-up amount (assuming it had not already been used up). Thus, the individual would not have used the 414(v) $2,000 catch-up towards the $5,000 catch-up limit of 2006, and the 2006 catch-up could never be made up in a future year. However, if the participant wanted they could have put in the $3,000 catch-up towards the 15 year of service catch-up and an additional $5,000 for the 414(v) catch-up for a total of $23,000 in 2006 ($15,000 + $3,000 +$5,000). In other words, the first dollars contributed above the base elective deferral limit are deemed to be the Section 402(g)(8), Years of Service amounts and not the annual age 50 or over, 414(v) catch-up contribution limit.

The rule of thumb to keep in mind is that even though the individual is over age 50, the 15 years of service catch-up is required to be used before the 414(v) age 50 or over catch-up can be used.

Up to 5 years of Post-Retirement Contributions Based on includible compensation from last year of work prior to retirement.
EGTRRA Section 632(a)(2)(C) (and clarified by JCWAA 411(p) ) allows for employer contributions to a 403(b) annuity to be made for an employee for up to five years after retirement based on includible compensation from the last year of service before retirement. Includible compensation for purposes of the 403(b) contribution is the amount of compensation received from the employer and includible in the employee’s gross income for the most recent period (ending not later than the close of the employee’s tax year) that can be counted as a full year of service. This compensation may not precede the taxable year by more than five years. Finally, includible compensation may not include any amount contributed by the employer to the employee’s 403(b) annuity. This is a major advantage available to a 403(b) participant, because it can allow for an employee to arrange for the employer to contribute up to $220,000 (5*$44,000, as adjusted) to the plan after they terminate employment. For example, for school districts wishing to buy out the contract of an administrator, this provides added flexibility for both parties. The district gets to pay out amounts over time and the employee gets contributions to a tax favored arrangement. (Warning — such amounts are subject to discrimination testing, so the school district might have trouble buying-out the highly compensated Superintendent.)

JCWAA also clarified that 403(b) contributions are subject to 415 limits for the year in which the contributions are made - regardless of whether the contributions are vested or not at the time they are contributed.

Deemed IRA
This option for a 403(b) would require the incorporation of model of IRA language to the 403(b). If this is adopted into the plan, the employees may contribute up to the IRA limit to a deemed IRA account. Deemed IRAs are possible in a 403(b). The Deemed IRA portion of the 403(b) plan must follow the regular IRA rules that require the Custodian of IRA assets to be a bank or IRS-approved Custodian. Therefore, deemed IRAs cannot be self-custodied. Note: the rule actually speaks to the need to have a party that would qualify as a non-bank Trustee under Code Section 408(n). However, there are no trusts in 403(b) arrangements, just custodial accounts.

Designated Roth 403(b) Account. The proposed Roth distribution rules released in January addressed the Roth 403(b) account and stipulated that the Final Roth 401(k) regulations apply to Roth 403(b) accounts. The proposed rules also stated that a Roth 401(k) could not be rolled into a Roth 403(b) account nor could a Roth 403(b) be rolled into a Roth 401(k). Click here for the article on the final Roth Regulations issued in December 2005. Stay tuned for an article on the designated Roth 403(b) account as addressed in the proposed Roth distribution regulations.