Code Section 415(k)(4) and 403(b)'s

[traveler]

I am curious as to how other practitioners are interpreting Code Section 414(k)(4) which was added by EGTRRA. This section provides

‘‘(4) SPECIAL RULES FOR SECTIONS 403(B) AND 408.— For purposes of this section, any annuity contract described in section 403(B) for the benefit of a participant shall be treated as a defined contribution plan maintained by each employer with respect to which the participant has the control required under subsection (B) or © of section 414 (as modified by subsection (h)). For purposes of this section, any contribution by an employer to a simplified employee pension plan for an individual for a taxable year shall be treated as an employer contribution to a defined contribution plan for such individual for such year.’

It is effective for limitation years beginning after December 31, 1999. It seems to retroactively require employers to aggregate contributions between employer 401(a) plans and 403(B) contracts that might not have any employer money, but I am not quite sure due to the refernce to 414(h) which deals with pick-ups. If I am reading it correctly, then some clients need to review 2000 and 2001 401(a) and 403(B) contributions for any excees contributions.

What commentary that I have seen about this provision just repeats the law.

[Carol V. Calhoun]

This provision is intended to require aggregation of 403(B) and 401(a) plans for purposes of section 415 only if the employee controls an employer that maintains the 401(a) plan. For example, if a state university had both a 401(a) and 403(B) plan, those plans would not be aggregated for section 415 purposes. However, if a state university with a 403(B) plan had a member of the medical school faculty who also maintained a private medical practice of which s/he was the sole owner, the university's 403(B) plan would have to be aggregated with any 401(a) plan maintained by the private practice for section 415 purposes.

The reason this provision is retroactive is that it was included in section 415(e) before that subsection was repealed. The subsection was repealed in order to eliminate the requirement for a highly complex aggregation of defined benefit and defined contribution plans in determining 415 limits. The elimination of the provision regarding 403(B) plans was an unintended side effect of that repeal, and Congress has now moved to correct that retroactively.

As a practical matter, the change is in the interest of most employers that maintain 403(B) plans. In the absence of 414(k)(4), an employer would have to aggregate its own 401(a) and 403(B) plans in applying the 415 limits. Since few employees have their own separate businesses, requiring aggregation of a 403(B) plan only with a 401(a) plan maintained by a business controlled by the employee is a lot more favorable than requiring aggregation of the 401(a) and 403(B) plans of the employer that maintains the 403(B) plan.

Moreover, the issue is commonly dealt with by notifying employees that if they have a separate business, they may have to limit contributions to a 401(a) plan of the separate business. The burden is on any employee who has a separate business to make sure that his or her 401(a) plan complies.

[traveler]

Thanks - that makes sense.

[mbozek]

I thought under IRS regs (1.415-8) that the the excess contributions would be deemed made to the 403(B) plan to prevent disqualification of the qualified plan in the event that the aggregate contributons exceed the 415 limits

[Carol V. Calhoun]

The regulatory language (it's actually in Treas. Reg. § 1.415-9) states as follows:

Combining section 403(B) annuity contract and qualified defined contribution plan. In the event that combining a section 403(B) annuity contract and a qualified defined contribution plan under the provisions of section 415(f)(1)(B) causes the limitations of section 415© and §  1.415-6 applicable to a participant under the defined contribution plan to be exceeded for a particular limitation year, the excess of the contributions to the annuity contract plus the annual additions to the plan over such limitations is treated as a disqualified contribution to the annuity contract and therefore includable in the gross income of the participant for the taxable year with or within which that limitation year ends.

Thus, neither plan is disqualified, but the excess contributions are taxable to the employee. However, the IRS has consistently taken the position that an employer will not be held liable for withholding on the excess if it reasonably believed that there was no excess. Thus, it appears that getting the employee to certify either that (a) s/he did not have another business, (B) the other business did not have a retirement plan, or © the combination of the 403(B) and the other business's retirement plan(s) was within the limits of section 415 should protect the employer. At that point, if the employee's statements turned out not to be true, it would only be the employee's individual income taxes, not the employer or the 403(B) plan as a whole, that would be affected.

[mbozek]

Carol: I am not sure that the employer is off the hook on the applicable withholding taxes just because the employee lied on a form. FICA taxes can be collected from a responsible party of the employer and there is no S/l for back taxes.

Second I question the wisdom of your requirement to get a certification from the employees- What if employees do not send back a certification? There are many employees who cannot be fired or disciplined for noncompliance, e.g., tenured faculty, senior executives, employees under contract. Also asking sfor a certification may violate privacy rules of the employer. Better not to ask the question if employer is not sure that a favorable response will be provided. Better solution is to inform employees of the consequences of having two plans and the need to report contributions to outside plan to the employer because that is the most that an employer can do.

[Guest D Ledden]

My question is loosely related to this thread. One employer maintains two plans, a 403b with employee contributions only, and a 401a with a 1% integrated contribution only. It is my understanding, both 401k & match features can be added to the 401a plan. If that is correct, and the employer adds both features, does the employer 'lose' the benefit of no testing in the 403b plan?

[mbozek]

The 403(B) plan contributions will not be aggregated with the qualfied plans as long as there are no employees who own more than 50% of the employer who sponsors the qualfied plan

[Carol V. Calhoun]

As a practical matter, 403(B) contributions will never be aggregated with 401(a) contributions of the same employer, since an employee cannot own more than 50% of the type of employer eligible to sponsor a 403(B) plan (a tax-exempt organization, or a public school or university) in the first place. The only time aggregation is required is if the employee participates in a 403(B) with an employer and also owns a taxable business that provides a 401(a).