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Requiring 403(b) participants to use catch up to avoid exclusion allow


Guest Jeff Kropp
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Guest Jeff Kropp

My client's 403(B) program has been audited by the IRS. In order to both prevent a number of individuals from contributing excess in the audit year, and for administrative ease, our client would like to limit the amount that may be deferred to the plan to the amount described in Catch Up C. Basically, this is substituting 415 limit for exclusion allowance for all future years. Of course, no other special catch up elections would be available for certain long-time employees, who would be penalized. Yet requiring that a catch up be used (probally on the annual deferral form) would make life easier on client and satisfy IRS with regard to those who failed exclusion allowance in audit year.One gray area is whether client can require, as a condition of participation in its 403(B) plan, that employees to use a catch up election, because the election is normally used to justify an individuals tax return. Any thoughts? The IRS informally has said that this is probally ok, as long as it does not appear that the IRS is requiring that catch up elections be made.

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  • 4 months later...

It seems to me that all you are doing here is imposing an upper limit on the amount employees can contribute, not requiring them to actually make the election, so you should be okay. Of course, this would not completely eliminate the risk of an overcontribution, although it would minimize it. The reason is that some people (those who have made A and B elections in the past) are not eligible to make C elections.

Of course, we are all looking forward to the abolition of the maximum exclusion allowance. That provision was in the vetoed tax bill, and speculation is that it will also be included in whatever tax bill DOES pass this year.

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The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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  • 2 weeks later...
Guest Brent Rowell

Administratively "C" election is probably the only way your client can calculate 403(B) limits. (Few employers have the necessary records for other methods)

I very much doubt that senior (length of service) employees would be forced into an election (regular 403 rules using length of service as a multiplier would cover them)

First year employees might be a different story..

If I remember correctly an employee could change an election by amending prior tax returns to undue prior election (per IRS)

(I do not know how many years would have to be modified). Further an employee does not have to declare an election on tax forms ...just compute accordingly

Brent

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Brent

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