Contribution limits for 2007

[joel]

A buddy of mine is insisting that the combined employee and employer contribution cannot exceed $15,500 for 2007. I have told him he is ignoring the section 415 limits and when these limits are included the combined contribution limit is $45,000. Please tell us that my buddy is wrong.

Thanks,

Joel L. Frank

[John Feldt ERPA CPC QPA]

Yes, I'm the buddy - nice try! - I did also say that they can go up to $31,000 (15,500 x 2) if they are eligible for the special last 3 years catch-up and they have enough unused prior limits to do so. Let's see what the commentators say!

[Guest Blbvip]

Sorry Joel, the limit is the $15,500 for both employee & employer monies except for the exception mentioned above.

§1.457-2. Definitions. --This section sets forth the definitions that are used under §§1.457-1 through 1.457-11.

(b) Annual deferral(s)--(1) Annual deferral(s) means, with respect to a taxable year, the amount of compensation deferred under an eligible plan, whether by salary reduction or by nonelective employer contribution.

[joel]

Yes, I'm the buddy - nice try! - I did also say that they can go up to $31,000 (15,500 x 2) if they are eligible for the special last 3 years catch-up and they have enough unused prior limits to do so. Let's see what the commentators say!

John: Once again you refuse to factor in the 415 limits. Your entire post refers to employee contributions. Stop and think what you are asserting: If the employee puts in $15,500 for 2007 then the employer cannot put in its match.

[joel]

Sorry Joel, the limit is the $15,500 for both employee & employer monies except for the exception mentioned above.

§1.457-2. Definitions. --This section sets forth the definitions that are used under §§1.457-1 through 1.457-11.

(b) Annual deferral(s)--(1) Annual deferral(s) means, with respect to a taxable year, the amount of compensation deferred under an eligible plan, whether by salary reduction or by nonelective employer contribution.

"Annual deferral" includes employee contribution and employer contribution. Where do you get the aggregate sum of $15,500 for 2007?

The following list comes directly from the IRS website. Notice item 3.

=================================================================

EP Examination Process Guide - Section 2 - Compliance Monitoring Procedures - Top Ten Issues - IRC 403(b)/457 Plans

Top ten issues identified during examinations of IRC 403(b)/457 plans.

1. Excess IRC 402(g) Contributions, Including Violating the 15-Year Rule Limitations

The amount of salary reduction contributions exceeds the annual dollar limitation of $15,000 for 2006 ($15,500 for 2007). The excess may be the result of poor internal controls or failure to aggregate deferrals made to other 403(b) or 401(k) plans. IRC 457 plans do not have to be aggregated with these other plans, but are still found to violate these limits. Violations of the 15-year catch up rule occur where the employee has exceeded the $15,000 lifetime limitation or where the employee is not employed by an eligible employer.

2. Universal Availability, IRC 403(b)(12)(A) Excluding Eligible Employees From Participation, Usually Part-Time Employees That Would Qualify to Participate

Eligible employees are not given the right to make salary reduction contributions. Employers often misapply ERISA eligibility and coverage conditions to employees who are otherwise eligible to make salary reduction contributions under IRC section 403((b)(12).

3. Excess 415 Contributions Made

Generally, the sum of elective deferrals and employer contributions cannot exceed the lesser of $44,000 ($45,000 in 2007) or 100% of Includible Compensation for 2006.

4. Plan Loans That Violate IRC Section 72(p)

Common violations include: failure to make required payments when due, resulting in default of the entire loan; poor documentation; and loans from multiple vendors that in the aggregate exceed the IRC 72(p) limits.

5. Hardship Distribution Failures (IRC Section 403(b)(11)(B))

Common violations include: inadequate documentation that the distribution is the result of a financial hardship and distributions from multiple vendors that in the aggregate exceed the amount needed to relieve the hardship.

6. Unforeseeable Emergency Distribution (IRC Section 457(d)(1)(A)(iii))

Common violations include: inadequate documentation of the unforeseeable emergency, lack of proper internal controls, and distributions that exceed the amount needed for the unforeseeable emergency.

7. IRC Section 457(f) Plan Failures in Operation

IRC section 457(f) plans that do not have any real substantial risks of forfeiture for substantial services performed. For example, a 457(f) plan that has non-compete language as one of the risks of forfeiture but in operation that is not likely to ever be applied, such as allowing for voluntary termination then adhering to a short non-compete period and collection of benefits.

8. IRC Section 457(f) Plan Cafeteria Style Benefits

IRC section 457(f) plans that allow participants to chose from a number of different types of benefits with a default selection into a 457(f) plan. These types of arrangements usually do not contain a true risk of forfeiture and contain devices such as unrealistic non-compete clauses, rolling risk of forfeiture, flexi-choices and options that do not add a real risk of losing a benefit and appear to vest the benefit to the participant immediately.

9. IRC Section 403(b) Annuity Contract Problems

The Annuity Contract is outdated and has not been updated for current requirements such as for IRC 402(g) contribution limitations, IRC 401(a)(9) required distributions, and IRC 401(a)(31) eligible rollover requirements. Also new endorsements not being given out to all annuity contract holders.

10. Ineligible Plan Sponsors of IRC Section 403(b) and IRC Section 457 Plans

IRC 403(b) - The organization must qualify as a public educational organization or be exempt under IRC 501©(3).

IRC 457 - The organization must be a state or local government or a tax exempt organization under IRC 501©.

Some examples of failures are of a charitable hospital with a 403(b) plan being taken over by a local government entity and not terminating the 403(b) plan and of quasi-federal government organizations adopting IRC 457 type plans.

[joel]

Carol V. Calhoun's annually updated chart says: $45,000 for 2007.

[joel]

Carol V. Calhoun's annually updated chart says: $45,000 for 2007.

IRC section 415© says: (The "annual addition" is adjusted for inflation annually. The "annual addition" for 2007 is $45,000. 457(b) plans are clearly included)

© Limitation for defined contribution plans

(1) In general

Contributions and other additions with respect to a participant exceed the limitation of this subsection if, when expressed as an annual addition (within the meaning of paragraph (2)) to the participant’s account, such annual addition is greater than the lesser of—

(A) $40,000, or

(B) 100 percent of the participant’s compensation.

(2) Annual addition

For purposes of paragraph (1), the term “annual addition” means the sum of any year of—

(A) employer contributions,

(B) the employee contributions, and

© forfeitures.

For the purposes of this paragraph, employee contributions under subparagraph (B) are determined without regard to any rollover contributions (as defined in sections 402 ©, 403 (a)(4), 403 (b)(8), 408 (d)(3), and 457 (e)(16)) without regard to employee contributions to a simplified employee pension which are excludable from gross income under section 408 (k)(6). Subparagraph (B) of paragraph (1) shall not apply to any contribution for medical benefits (within the meaning of section 419A (f)(2)) after separation from service which is treated as an annual addition.

[Guest mjb]

Joel: IRC 457(e)(15) specifically states that the max contribution a 457(b) plan from both the employer and employee beginning in 2006 is $15,000 which is increased for inflation to $15,500 in 2007. If you scroll down on the benefitslink home page in the left hand column to inflation adjusted limits you will find the 2007 IRS limit for 457b plans as $15,500. I think you should ask Carol or the authors of the 457 retirement handbook whether they agree with you.

[joel]

Joel: IRC 457(e)(15) specifically states that the max contribution a 457(b) plan from both the employer and employee beginning in 2006 is $15,000 which is increased for inflation to $15,500 in 2007. If you scroll down on the benefitslink home page in the left hand column to inflation adjusted limits you will find the 2007 IRS limit for 457b plans as $15,500. I think you should ask Carol or the authors of the 457 retirement handbook whether they agree with you.

MJB: So according to your understanding of the matter item number 3 listed by the IRS on its website excludes 457 plans notwithstanding the fact that it makes no mention whatsoever of this important fact. I submit that because it does not specify which type of plan it is referring to it is referring to both types of plans because the heading of the list of items: reads: "Top ten issues identified during examinations of IRC 403(b)/457 plans." In item number 1, for example, the Service makes no mention of which type of plan it is referring to so it has to be referring to both because of the wording of the heading. I reach the same conclusion for items 4 nd 10.

In your opinion why does IRC section 457(e)(15) supercede section 415©?

Joel L. Frank

[joel]

Joel: IRC 457(e)(15) specifically states that the max contribution a 457(b) plan from both the employer and employee beginning in 2006 is $15,000 which is increased for inflation to $15,500 in 2007. If you scroll down on the benefitslink home page in the left hand column to inflation adjusted limits you will find the 2007 IRS limit for 457b plans as $15,500. I think you should ask Carol or the authors of the 457 retirement handbook whether they agree with you.

MJB: So according to your understanding of the matter item number 3 listed by the IRS on its website excludes 457 plans notwithstanding the fact that it makes no mention whatsoever of this important fact. I submit that because it does not specify which type of plan it is referring to it is referring to both types of plans because the heading of the list of items: reads: "Top ten issues identified during examinations of IRC 403(b)/457 plans." In item number 1, for example, the Service makes no mention of which type of plan it is referring to so it has to be referring to both because of the wording of the heading. I reach the same conclusion for items 4 nd 10.

In your opinion why does IRC section 457(e)(15) supercede section 415©?

Joel L. Frank

MJB: IRC section 457(e)(15) states:

(15) Applicable dollar amount

(A) In general

The applicable dollar amount shall be the amount determined in accordance with the following table:

For taxable years The applicable beginning in dollar amount: calendar year: 2002 $11,000 2003 $12,000 2004 $13,000 2005 $14,000 2006 or thereafter $15,000.

(B) Cost-of-living adjustments

In the case of taxable years beginning after December 31, 2006, the Secretary shall adjust the $15,000 amount under subparagraph (A) at the same time and in the same manner as under section 415 (d), except that the base period shall be the calendar quarter beginning July 1, 2005, and any increase under this paragraph which is not a multiple of $500 shall be rounded to the next lowest multiple of $500.

You assert: "Joel: IRC 457(e)(15) specifically states that the max contribution a 457(b) plan from both the employer and employee beginning in 2006 is $15,000 which is increased for inflation to $15,500 in 2007."

Please highlight for me where it says that these dollar amounts INCLUDE employer contributions?

Thanks,

Joel L. Frank

[J Simmons]

Hey, Joel--

You might want to check out Treas Reg § 1.457-2(a) and (b)(1). Subsection (a) defines amount(s) deferred as annual deferral(s), which paragraph (b)(1) in turn explains is "the amount of compensation deferred under an eligible plan, whether by salary reduction or by nonelective employer contribution". Then go to IRC § 457(b)(2) where the amounts that may be deferred are limited to the lesser of the applicable dollar amount or the employee's compensation. Then IRC § 457(e)(15) limits applicable dollar amount to $15,000.

So, tracking it back, the $15,000 applicable dollar amount is a limit on the amount of deferrals into a 457b plan if it is less than the employee's compensation. Amounts are considered deferred under an eligible plan whether due to salary reduction or nonelective employer contribution. Thus, the $15,000 limit applies to the combined amount of salary reductions and nonelective employer contributions.

This regulation is also consistent with the implication of the statutory language. Deferred compensation is the terminology used, particularly in the limitation language of IRC § 457(b)(2). The statute defines as a subcategory nonelective deferred compensation (see IRC § 457(e)(12). So it would not be logical that the more generic deferred compensation somehow excludes the subcategory of nonelective employer contributions.

I think your 'buddy' is right.

[Guest mjb]

Reg 1.457-2(b)(1) provides that the annual deferrals means with respect to a taxable year, the amount of compensation deferred under an eligible 457 plan, whether by salary reduction or employer contribution. Reg 1.457-4©(1) provides that (except for catch ups) in order to be an eligible plan the plan must provide that the annual deferral amount for a taxable year does not exceed the lesser of $15,000 (2006) or 100% of compensation. After 2006 the $15,000 amount shall be increased for cost of living.

[joel]

Hey, Joel--

You might want to check out Treas Reg § 1.457-2(a) and (b)(1). Subsection (a) defines amount(s) deferred as annual deferral(s), which paragraph (b)(1) in turn explains is "the amount of compensation deferred under an eligible plan, whether by salary reduction or by nonelective employer contribution". Then go to IRC § 457(b)(2) where the amounts that may be deferred are limited to the lesser of the applicable dollar amount or the employee's compensation. Then IRC § 457(e)(15) limits applicable dollar amount to $15,000.

So, tracking it back, the $15,000 applicable dollar amount is a limit on the amount of deferrals into a 457b plan if it is less than the employee's compensation. Amounts are considered deferred under an eligible plan whether due to salary reduction or nonelective employer contribution. Thus, the $15,000 limit applies to the combined amount of salary reductions and nonelective employer contributions.

This regulation is also consistent with the implication of the statutory language. Deferred compensation is the terminology used, particularly in the limitation language of IRC § 457(b)(2). The statute defines as a subcategory nonelective deferred compensation (see IRC § 457(e)(12). So it would not be logical that the more generic deferred compensation somehow excludes the subcategory of nonelective employer contributions.

I think your 'buddy' is right.

Why haven't you included section 415© in your analysis?

[QDROphile]

Joel: At one time I decided not to respond to any of your posts because you take strange postions and then cling to them without regard to the responses that you are suppposedly soliciting, but I cannot resist joining the chorus against your proposition that is so clearly wrong. Not that it will matter.

[J Simmons]

Joel to JSimmons: "Why haven't you included section 415© in your analysis?"

There are two contextual references in IRC § 415© to IRC § 457. One refers to rollovers not being taken into account as benefit accruals subject to the 415© limit. IRC § 415©(2). Another includes an employee's elective deferrals under IRC § 457 in the definition of compensation for purposes of applying the 415© limit. IRC § 415©(3).

Neither reference in IRC § 415© to IRC § 457 specifies that the IRC § 415© limit applies to 457 plans. If it did, the more specific limits in IRC § 457 would nonetheless apply and limit the 457 plan amounts to $15,500 in 2006.

Keep in mind, IRC § 415© is a limitation, not a safe harbor. The logic you want to apply would mean that since IRC § 415© also refers to IRC § 402(g)(3) 'elective deferrals' (IRC § 415©(3)(D)(i)), then employees may electively defer up to $45,000 this year into 401k plans (because of the reference to them in IRC § 415©) rather than the specific limits applicable to 'elective deferrals' found in IRC § 402(g) ($15,500 in 2006).

If you are unpersuaded, good luck in the audits--you'll need all the luck you can get because logic and argument won't help you on this issue.

[joel]

Joel: At one time I decided not to respond to any of your posts because you take strange postions and then cling to them without regard to the responses that you are suppposedly soliciting, but I cannot resist joining the chorus against your proposition that is so clearly wrong. Not that it will matter.

You got that right!!!!!!!!!!

[joel]

For a participant that contributed $15,500 via salary reductions for 2007 to which Plan account is the employer's contribution made?

[Mike Preston]

Whichever one the plan sponsor wishes to disqualify. Although in the context of 457 plans, I believe the net result is just that the amounts in excess of the deferral limitation are treated as taxable.

Joel, I don't know why Congress decided to put 457 plans on an unequal footing relative to other plans (403 and 401), but they did. A 457 plan is generally referred to as a "plan of deferred compensation". No profit sharing. No pension. Simply no true "employer contribution." Hence, all contributions to such a plan, whether they are made by the employee or the employer are TREATED as the same thing: deferrals. Those deferrals are subject to the general limitation on deferrals ... the 402(g) limit (or its equivalent in the context of a 457 plan).

If you don't like the result, you should find a member of Congress and see if they have a sympathetic ear.

[John Feldt ERPA CPC QPA]

Thank you Mike, John, QDROphile, mjb, and blbvip. Much appreciated.

[Guest angela.smith@mchsi.com]

I put in a call to Fidelity which an employee in our school district has holding the assets for his 403b and 457 plans. They maintained that the combined limit for the 2 plans was $45,000 for 2007 and that an additional $5000 could go in as this employee is over 50. We anticipate that $45000 would come as an "employer" contribution and the $5,000 from the employee. In reading the responses on this board I am totally confused as to the accuracy of their info. Any insight and guidance as to where to get concrete info would be appreciated!

Thanks!

[Guest mjb]

Under IRC 415© total contribution to 403b plan for employee over 50 is $50k from both employer and employee contributions of which employee is permitted to contribute $20,500 by salary reduction in all cases and may include an additional $3,000 in salary reduction contributions for a maximum of 5 yrs if the employee has at least 15 yrs of service. The maximum emplyer contrbution is reduced by the emplyee's contributions e.g., if employee contributes $23,500, the maximum employer contribution is $26,500. However the employer contrbution cannot exceed $45,000.

An additional $20,500 can be contributed to a govt 457(b) plan on behalf of an employee who is age 50 from a combination of employee and employer contributions. There is an additional catch up provision for employees who are within 3 yrs of normal retirement but this catch up is too complicated for this post.

Adding the two limits together, the max contribution is $70,500 (50,000 for 403b and $20,500 for 457) .

See IRS publicaton 571 for 403b plan limits and pub 525 for 457 plan limits.

[John Feldt ERPA CPC QPA]

Angela, mjb has it. To recap that post:

Employee contribution maximums (assuming ee is age 50 and the school is a government employer):

1. 457(b) plan: $15,500 + greater of: $5,000 catchup, or the special catch-up = $20,500 max (if no special catchup)

2. 403(b) plan: $15,500 + $5,000 catch-up = $20,500 max

Total maximum employee deferral (contribution) for both plans combined = $41,000.

(This assumes the special catch-up is not used, and that both plans allow the $5,000 catch-up)

Employer contribution maximums

A. 457(b) plan: the amount in #1 above is the max, so if the ee maxes out, no further 457(b) contribution is allowed

B. 403(b) plan: $45,000 reduced by employee deferrals (but not reduced by catch-up deferrals)

So if the employee defers the maximum in #2 above, the maximum employer contribution is $29,500 as follows:

$45,000 - $15,500 = $29,500

Overall maximum for both plans = $41,000 + $29,500 = $70,500 (if no special catchup)

That being said, your employer's plans might not contribute any employer dollars, perhaps it only provides for deferrals. Or perhaps the employer has the discretion to contribute if they have funds available to do so, a discretionary employer contribution. In any case, these things would be spelled out in some type of plan summary, perhaps they have even done a full summary plan description for their employees to explain these items.

I hope this helps. Let me know if you're curious about the special catch-up. We've only shown the $5,000 age 50 catch-up here.

[Guest angela.smith@mchsi.com]

Awesome info- Thanks guys!

[joel]

I put in a call to Fidelity which an employee in our school district has holding the assets for his 403b and 457 plans. They maintained that the combined limit for the 2 plans was $45,000 for 2007 and that an additional $5000 could go in as this employee is over 50. We anticipate that $45000 would come as an "employer" contribution and the $5,000 from the employee. In reading the responses on this board I am totally confused as to the accuracy of their info. Any insight and guidance as to where to get concrete info would be appreciated!

Thanks!

QDROphile:

I guess we should remove Fideltiy Investments from the well regarded chorus!

Joel

[Guest jaspers]

Regarding the three year catch up for 457:

I vaguely remember reading something that the max catch up limit per year permitted is whatever the current years' limit is. For example:

A 457 participant wants to take advantage of the 457 catch up in 2007 and was not a plan participant in 2000. What is the maximum catch up permitted? Is it $15,500 or is it what the maximum was in 2000?

Thanks.