MEA Repeal

[david rigby]

Any thoughts on whether it makes sense to continue doing the MEA calc, or at least gather the data on annual basis, until we know for sure that the MEA repeal does go away permanently?

Any experience discussing this with the plan sponsors?

[Guest Yanikoski]

First, I confess to being completely biased on this question, since I am a software vendor offering 403(B) contribution limit calculations. But we supply software to a lot of the big product vendors in this market, and so we have an unusually broad opportunity to hear about what is going on.

If your question relates to whether or not you should continue to collect data that would be needed to calculate under the repealed formula, I don't think most people are worrying about that. No one seems to expect that the old rules will ever return. There may be many provisions of the tax bill that will revert to their previous rules or even be repealed before they are currently set to expire, but the odds of this happening to the old MEA rule seem very slight. NOBODY (with the occasional exception of me, on my grinchy days) wants the old rules back.

However, many people don't realize that under the NEW rules, you still need to keep historical records of prior salary deferrals. That is because the $3000 catchup rule has not changed, and one of the qualifications for that catchup is that average salary deferrals during employment with the current employer not average more than $5000 a year. You need the historical data to calculate this average. (This limit is actually hit more often than you might think, and will be hit a lot more often under the new rules.) Employer contributions do not need to be tracked this way under the new rules, but most plans don't have employer contributions anyway. As for keeping track of prior use of the old A, B and C catchups, even today the IRS is hardly in a position to catch people who have switched from one catchup to another. After a decade's hiatus, it will be virtually impossible for anyone -- participant, sponsor, or auditor -- to determine prior use of A, B or C -- so I wouldn't worry about it myself.

I have little direct contact with plan sponsors, but what I am hearing via my clients so far is mainly that (1) many, perhaps most, plan sponsors are not even aware that the old MEA rule and been repealed; (2) even those that are aware of it, however, still want to have contribution limits verified, if such calculations were being doing in the past; and (3) the situation is very much in flux, and over the next couple of years, as people get used to the new rules, things could change a lot.

I, too, would be interested in anyone else's viewpoint on these matters.

[MWeddell]

Great post. I'd add one point, that at least the IRS gives us guidance on the interaction between the old 403(B) catch-up rules and the new EGTRRA catch-up provision, it looks to me like one must exhaust any of the old 403(B) catch-up first before becoming eligible to make the new EGTRRA catch-up. That underscores the point that one must still track past elective deferrals.

[Belgarath]

I'm not sure I agree that you must first exhaust any of the other 403(B) catch-up provisions. Seems to me that as long as you run up against a limit, whether statutory or plan-imposed, that you can use an EGTRRA catch-up. Now, it's certainly possible that a non-EGTRRA catch-up will provide the client with a larger catch-up than the EGTRRA catch-up, but that's a separate issue.

[Guest Yanikoski]

As of right now, plan participants are clearly eligible to use BOTH catchups, for a potential deferral of up to $15,000 in 2002. I am not aware of any reason why the participant needs to use the $3000 catchup first, and since it would be disadvantageous to do so (because of the lifetime limit), my own assumption would be that the $1000 catchup should be used first.

[MWeddell]

I guess I took this thread on a bit of a tangent, but hopefully it was an interesting one!

If a 403(B) plan continues to allow the old $3,000 per year, $15,000 per lifetime catch-up contributions, then a participant must contribute those deferrals before becoming eligible for the new EGTRRA catch-up contributions. My source for this assertion is Code Section 414(v)(5)(B).

I agree that it would be more advantageous if a participant could first use EGTRRA catch-up contributions before using the older 403(B) catch-up contributions, but I don't believe it's allowed. Sure would have been nice if the proposed regulations had clarified this.

[Guest Yanikoski]

I'll buy that interpretation. Thanks for pointing it out!!

[Belgarath]

I understand what you are saying, I just don't happen to agree with the interpretation. I think the regulations did clarify that you only need hit one of the "applicable limits." The new 1.414(v)-1 regulations define an "applicable limit" as any of the following:

(i) Statutory limit

(ii) Employer-provided limit

(iii) Actual deferral percentage (ADP) limit

If you check those definitions, I think you'll agree that you don't have to use up your otherwise allowable 403(B) catch-up contributions in order to apply the EGTRRA catch-up.

[IRC401]

I agree with MWeddell (and wish that I didn't).

The $3000 catch-up increases the 402(g) limit, thereby requiring the employee to take advantage of the extra $3000 before he is able to use the 402(g) limit as the basis for making 414(v) catch-up contributions.

The employee could still make 414(v) catch-up contributions if his elective deferrals were limited by another limit. The ADP limit doesn't apply to 403(B) plans, and the 415 limit is not likely to be reached. Therefore, it appears that the only way for an employee to avoid using up his $3000 catch-up first would be for the plan to impose a limit equal to the 402(g) limit without the extra $3000.

[Belgarath]

Hmmm... you've convinced me you're right! I didn't think through the extra step. Suffering from optical rectitis again. Thanks to y'all for pointing this out.