403(b) Annual Additions
Rev. 06/05/09; E-mail Alert 2009-8

The rules regarding Section 415 annual additions for 403(b) arrangements are similar to those for qualified plans — and yet different.

Example 1      
Tax-exempt hospital has 403(b) plan and a qualified plan, i.e. a profit sharing plan. Dr. A defers $15,500 to hospital 403(b). Hospital matches it with $6,000. Hospital allocates $43,000 in profit sharing plan for Dr A. A total of $64,500 is allocated for Dr. A for the year. The section 415 annual additions limit is not violated, because the $21,500 in 403(b) treated as Dr. A’s own plan while the $43,000 in the profit sharing plan is treated as the hospital’s plan.

415 Limitation Issues
Special aggregation rule requires 403(b) plan to be aggregated with qualified plans for annual additions limit if the participant controls an employer. In such a case, for 415 annual additions purposes, the 403(b) plan will be aggregated with all the defined contribution plans that the participant maintains as the one in control of the employer. For 415 limitation purposes, the employer will be treated as if he or she also maintains the 403(b) plan. Further, control for 415 additions purposes is defined as owning more than 50% ownership in the other business (lowered from the 80% usually used for controlled group purposes).

Example 2      
Dr. B works for a tax-exempt hospital and has controlling ownership of his outside medical practice. The hospital has a 403(b) plan, and the practice he maintains has a profit sharing plan. Due to Dr. B’s controlling interest, the hospital’s 403(b) and his qualified plan are combined for 415 annual additions. However, the aggregation is only with respect to the annual additions for Dr. B’s benefits under the 403(b) plan and the profit sharing plan. Other employees who work for both entities have no control over the medical practice; thus, they are not subject to aggregating 403(b) and profit sharing annual additions.

Occurrence of Excess Annual Additions in a 403(b)

Example 3
Expanding the fact set in example 2, Dr. B works for a hospital with a 403(b) plan. Dr. B owns 100% of Corporation B, with a profit sharing plan. The hospital has a great year and contributes $25,000 for Dr. B to the 403(b) plan.

Corporation B contributes $40,000 to the profit sharing plan for Dr. B. As Dr. B controls Corporation B, the 403(b) plan and profit sharing plan are to be aggregated.

Dr. B’s aggregate annual addition is $65,000. Thus, there is a $16,000 Excess Annual Addition ($65,000-$49,000). The $16,000 of the $25,000 contributed to 403(b) plan is considered a disqualified contribution and is currently includible in Dr. B’s gross income. 403(b) compliance requires a separate account to be maintained for the disqualified contributions. Citation: §§1.415(a)-1(b)(2) and 1.403(b)-3(b). There is a similar example in §1.415(g)-1(b)(3)(iv)(C)(2).

Correction of Excess Annual Additions in a 403(b)
If the §415(c) annual additions limit is exceeded, the amount in excess is treated as a §403(c) contract, (rather than a §403(b)). The remaining portion of the contract continues to be subject to IRC §403(b), if separate accounts are maintained for 403(b) and 403(c) portions of the contract for the year of the excess and each year thereafter. Failure to separately account for the excess annual additions can result in the immediate taxation of the affected participant's entire 403(b) contract. Citation: §1.415(a)-1(b)(2) and §1.403(b)-3(b)(2)  (The Regulations were written so that the term contract includes both 403(b)(1) annuity contracts and 403(b)(7) custodial arrangements.)

Bill Grossman, QPA

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