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403 (b) deferrals after seperation


Guest Frankie

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As a result of EGTRRA, would someone be able to give me a practicle example of how someone who has seperated from sevice would still be able to defer into a 403(B) plan for up to 5 years after seperation.

Also, could anyone explain in simple english how a participants "most recent one-year period of service" is defined for 403(B) deferral purposes. Thanks.

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  • 2 weeks later...
Guest STLGiant

Food for thought...your first point might come into play in the situation of an "early-out" offered to any employee. For example in the Public School Districts, many teachers are being offered such a package. Their state retirement starts, but each 1/1 or thereabouts they will get a check for 100% or more of their compensation for a 3-4 year period. The compensation would be taxable, and based on the EGTRRA rules can be deferred. In fact, if structured correctly, the Board could purchase an annuity for the difference between what is allowable in maximum 403(B) and 415 limits. As to whether 457 applies, I'm not clear on that to comment--perhaps MJB will as he has expertise in both areas.

As to your second comment, the definition is well publicized in IRS Pub. 571 on 403(B) plans.

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Guest Yanikoski

Just to clarify, there is NO WAY to provide for salary deferrals after retirement. Contributions can still be made after retirement, but they have to be EMPLOYER contributions only.

Your second question relates to this, because even employer contributions would not be possible except for the unusual definition of includible compensation used for 403(B) plans. The essence of that definition did not change with EGTRRA: includible compensation is compensation earned in the last FULL YEAR of service under the employer offering the plan. Even if the participant is now retired, therefore, there is still includible compensation. If the person was working full time, the compensation would be that earned during the final 12 months of employment. If the person, worked half-time, it would be that earned during the final 24 months. And so on....

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Guest STLGiant

Chuck, I respectfully suggest that you didn't include compensation after 5 years after separation of service. Includible compensation DOES include compensation after separation of service.

Here's the cite from Pub. 571, Chapter 9, page 18:

...your includable compensation does not include any amounts received from a former employer AFTER the 5th year following the year in which your employment is terminated...

Am I missing something?

:confused:

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Guest Yanikoski

There are various wrinkles in the strict definition of includible compensation, and I was not trying to address them.

I have wondered once or twice about the one you cite. It strikes me as completely superfluous, and I don't know why the IRS even includes in Publication 571. The employer can't make contributions to the 403(B) plan after the 5th year following termination, so includible compensation is no longer an issue at that point. There must be some scenario they have in mind that I haven't thought of.....

Other forms of termination or post-termination pay are includible only to the extent that they were EARNED during the final full year of service. My understanding of this is as follows: assume a half-time teacher who retired after 40 years, and who ended up with 100 days of unused sick/vacation days for which she was compensated at or shortly after retirement. That pay is "includible" for 403(B) purposes only to the extent that it compensates for unused sick/vacation pay accrued in the last 24 months (i.e., two half-years) of employment. The rest of the termination pay is not includible compensation for purposes of calculating the contribution limit.

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Guest STLGiant

Chuck, I know that the issue had to do with early outs offered to K-12 employees. there has been a couple of articles written on this by an attorney who does work with the National Tax Sheltered Annuity Assn. I can't remember her name, but seem to think she was out of PA. Perhaps Ellie Lowder can shed more light on the subject as she does work with them too...

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Guest Yanikoski

You're referring to Kristi Cook. She's extremely knowledgeable and experienced regarding these situations, and I would always defer to her about them. And I would encourage anyone with serious questions about actual situations to solicit her assistance.

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Public School Districts are routinely setting up post-employment contributions to 403(B) plans because of the EGTRRA change (the new definition under IRC 403(B)(3) now permits employer (not deferral) contributions to be made for a period of up to 5 tax years following the tax year in which the employee terminated employment. As Chuck said, the annual limit is based on 100% of the includible compensation earned in the last period that adds up to 12 full months of service. Caution has to be exercised not to give affected employees a cash option - e.g., employer contributions (often to replace unused leave pay where state law permits) must remain in the control of the employer. Very Hot Market - and one on which I get TONS of questions from interested employers, providers, and 403(B) practitioners. As an independent consultant, I have assisted in setting up such plans, discussed in depth with the IRS folks, and responded to questions galore. This is one of the hottest aspects of the EGTRRA changes in the public school segement.

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Guest STLGiant

Ellie:

Is this information available to NTSA Members or is this something that must be done consulting directly with you?

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I was reading over the replies and have a question. Will someone please provide the IRC sections or Treas. regulations cites that will not allow an elective salary deferral for amounts received during retirement? For example, if an employee retires on 12/31/02 and receives his final paycheck on 1/1/03 ($5,000, consisting of regular biweekly pay and unused vacation), what laws or regulations specifically prevent the employee from electing to defer some or all of the $5,000 under 402(g) and 403(B)?

Thanks,

Ken Davis

Univ. of South Alabama

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The IRS (in informal discussions) takes the position that elective deferrals CAN BE MADE if severance pay is paid as soon as administratively possible following the retirement date. They have commented to me that "a matter of weeks" might be ok to give the employer time for final calculations and issuance of the severance check but that "a matter of months probably is not ok". Thus, in your situation, elective deferrals would be permitted from that final check issued very soon after retirement! I just recently reopened this issue w/key staffer at the IRS - and, the above continues to be their current position!

Other than that, of course, elective deferrals (as correctly pointed out in this thread) are not permitted post-employment.

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Nope - wish I could. My info comes from informal discussions with the IRS (frequent, I might add), and I wish we had regulation. Unfortunately, I am told that the IRS has begun writing regulations (the first, they say, in 38 years), but that it may be years before we see them. They point out that it took five years to write the proposed regulations for 457 plans (issued this year, finally). It is now clear, post EGTRRA, that non-salary reduction contributions can be made post-employment (for up to 5 tax years following the year of severance); however, elective deferrals, according to their informal remarks, are not permitted, except in the limited circumstances previously mentioned.

Have any of you seen anything to which we could point - e.g., PLRs? I haven't!

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