415(c) rules for 403(b) annuities

[Carol V. Calhoun]

Posted on behalf of Becky Miller:

I was curious about the ramifications of the elimination of Section 415(e)(5) for people who had made elections under IRC Section 415©(4)©.

Doing business a block from the Mayo Clinic and in many college towns, we get a lot of business with persons with complicated histories for the exclusion allowance. Frequently the employer will prefer to calculate the exclusion allowance using the 415 rules as permitted by 403(B)(2)(B). We also have individuals who wish to make the © election because they have outside income as coaches, physicians, consultants, etc.

It has been my understanding, that where the 415©(4) © election and the 403(B)(2)(B) election are in place and 415(e)(5) applies, the 403(B) plan is aggregated with the employer (say Mayo Clinic) and the outside practice/football camp(!) stands alone. However, in reading the regs. at 1.415-8(d)(2), it seems to say that under these circumstances the 403(B) plan is aggregated with the employer and with any outside practice of the individual. Is that only if 415(e) doesn't apply, i.e multiple DC plans involved or, heaven help me, have I misunderstood this rule for years?

I have only done this in the context of defined benefit plans, thus the 415(e)(5) language tended to sustain the disaggregation of the individual's plan from that of the institutional employer. But, without 415(e). I don't know if I can rely on that. For example:

LTR-RUL, UIL No. 403.04-00 Taxation of employee annuities, Annuities purchased by section 501©(3) organizations, Letter Ruling 8833047, (May 27, 1988) Section 1.415-8(d) of the regulations provides, generally, that the participant on whose behalf a section 403(B) contract is purchased is considered to have exclusive control of the annuity contract. Accordingly, the participant, and not the participant’s employer, is deemed to maintain the annuity contract. However, pursuant to section 415(e)(5) of the Code, the participant’s employer is considered to maintain the contract if the participant elects under section 415©(4)(D) to have the provisions of section 415©(4)© apply, or if the participant has the control of the employer required under subsection (B) or © of section 414 (as modified by section 415(h)).

This came up because an American Express guy who is trying to sell our person some investments for his 403(B) told him that he couldn't put anything in a 403(B) and should have another investment vehicle instead. He said that there was a recent court case/ruling/IRS settlement for a football coach that held this way. I can't find anything on this, so I thought I would post the message to the web and see if others had heard. (I ran it through CCH Access, not Lexis or Westlaw. I checked for 403(B) and 415© and got nothing.)

But I figured you might be interested. Especially if this is an unanticipated consequence of the elimination of 415(e).

[Carol V. Calhoun]

This does indeed appear to be an unanticipated consequence of the elimination of 415(e)--and one which the new tax bill would fix. There is a summary of the bill provision at http://benefitsattorney.com/taxbill.html--just look under "INCREASES IN LIMITS ON RETIREMENT PLAN CONTRIBUTIONS AND BENEFITS" in the table of contents and click on "SEC. 1222(B). AGGREGATE LIMITS FOR 403(B) AND QUALIFIED PLANS." Of course, the President and Congress have to go through their usual dance in which the President vetoes whatever bill is first presented to him, and then the President and Congress come up with a compromise bill. However, it appears that that provision is noncontroversial, and is likely to turn up in the final bill.

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