McKay Hochman Company, Inc.

402(g) Limits Set by Statute; 415 Limit Cost of Living Adjusted
For an individual in a 403(b) plan, the deferral limit has increased in 2009 to $16,500. If the individual will attain age 50 or older during the year, a catch-up contribution of $5,500 is also allowed. In addition, if the employer is contributing, the maximum that can be allocated is the lesser of 100% of earned income or $49,000 for 2009. Thus, in the case where an employee contributes the maximum of $16,500, the employer contribution can go as high as $32,500, if the employee earns $49,000 or more. With the catch-up, the maximum can go as high as $54,500.

The 15 Years of Service Catch-up Contribution
There is also a special catch-up contribution under Code Section 402(g)(7) for employees with more than 15 years of service with an educational, hospital, home health care or church organization. The additional contribution is the lesser of $3,000 or $15,000 minus previous contributions under (g)(7) or $5,000 multiplied by years of service minus previous deferrals.

For example, Michael Anthony, age 45, worked for 18 years for the same 501(c)(3) charitable employer. During that time, Mr. Anthony deferred a total of $56,000 into the employer’s 403(b) plan and in the last 3 years has deferred a total of $9,000 of special catch-up contributions. What would Mr. Anthony’s maximum catch-up amount be? Following the formula, the catch-up is the lesser of:

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)(7)) 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 special catch-up 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 of service with a qualified organization 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 an elective deferral contribution of $18,500. The first $16,500 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 $2,000 catch-up towards the $5,500 414(v) catch-up limit of 2009, and the 2009 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 $5,500 for the 414(v) catch-up for a total of $25,000 in 2009 ($16,500 + $3,000 + $5,500). In other words, the first dollars contributed above the base elective deferral limit are deemed to be the Years of Service Special Catch-up amounts (under Section 402(g)(7)) 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 $245,000 (5 x $49,000, as adjusted) to the plan after he or she terminates employment. For example, for school districts wishing to buy out the contract of an administrator, this provides added flexibility for both parties. The district can pay out amounts over time, and the employee receives contributions to a tax-favored arrangement. (Warning — while such amounts are normally subject to discrimination testing, since the school district is governmental in nature, there is no discrimination testing involved, thus allowing the buy-out of a 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.

Note: 403(b) arrangements may permit Designated Roth 403(b) deferrals in addition to pre-tax deferrals.

To learn more, call 973-492-1880 or e-mail info@mhco.com.