EGTRRA change to 403(b)

[Medusa]

Can anyone explain the significance of the following from EGTRRA?

"SEC. 632. EQUITABLE TREATMENT FOR CONTRIBUTIONS

OF EMPLOYEES TO DEFINED CONTRIBUTION

PLANS.

(a) EQUITABLE TREATMENT.—

...

(2) ...

(B) by striking paragraph (2), and © by inserting ‘‘or any amount received by a former employee after the fifth taxable year following the taxable year in which such employee was terminated’’ before the period at the end of the second sentence of paragraph (3).

[Michael Devault]

This provision expands the definition of "includible compensation" to include payments made within five years of termination. It would be useful in situations where employers offer incentives to older employees to retire early. These incentives generally come in the form of income payments over a specified period of time after termination.

I believe this new language permits persons taking advantage of such an incentive program to continue making contributions to their 403(B) plan, if desired, for a maximum of five years.

Anyone have another view on this?

[Ellie Lowder]

Michael, in my view this codifies previous private letter rulings which permit EMPLOYERS to make post retirement contributions - e.g., an employer who wishes to do so (early retirement incentive, replacement of severance pay) can contribute up to 100% of includible compensation maxed at $40,000 per year for up to five tax years after retirement.

[Guest Yanikoski]

I agree with Ellie (as I generally do when I am thinking straight). It may be worth expanding a little. With the old MEA rule being repealed, and the section 415 rule replacing it, is interesting to note that for 403(B) plans only, the Section 415 definition of includible compensation is now going to be the same as under the old MEA rule. In the case of a retired person, this would mean that the employer could contribute up to 100% of the compensation the retired employee received in his/her last full year of service (cappted at $40,000). Any post-retirement payments would generally not be considered to be includible compensation and would not enter into the equation.

[Guest RJT]

Hi Chuck! There is also an interesting side to the continued use of "includable comp" for 403(B) 415 testing. Note that includable comp is from the common law employer, not from controlled group employer-as is the case for 415 comp for qualified plans. Thus, when running a 415 for a 403(B), you will not use 415©(3)/414(s)comp, which requires controlled group numbers. You will use the includable comp from the 501©(3) employer (or state educational org) for whom the participant performed services. This means that if you work for a couple of 501©(3)employers within the same "umbrella" hospital organization, you will have a couple of separate 403(B)/415 limits.