403(b) contributions - law changed?

[Guest Mary Ann]

For purposes of determining how much a minister may contribute to a 403(B) plan, has the 20% of compensation gone away? I notice now that the limit is the lesser of $40,000 or includable compensation. But I don't see anything about 20% any more.

[mbozek]

yes-it was repealed 12/31/01

[Guest Mary Ann]

So, if a minister has $40,000 W-2 compensation (plus $20,000 housing allowance) is his contribution limit $11,000 - or $12,000 if he is over age 50? Not limited at all by the 20% of $40,000?

[mbozek]

yes, if he is not subject to SS taxes.

[Guest Mary Ann]

Thank you for your reply. But, what is the difference if he is subject to SS tax? Does the maximum contribution level raise?

[Guest Yanikoski]

The contribution limits do not depend on Social Security.

You should keep in mind, though, that there is a special exception for church and church-related organizations permitting contributions up to $10,000/year (with a $40,000 lifetime limit on the extra amounts), even for employees who earn less than that. Obviously, they cannot make salary deferrals greater than their compensation, but the employer can make contributions on their behalf.

[Guest Yanikoski]

The contribution limits do not depend on Social Security.

You should keep in mind, though, that there is a special exception for church and church-related organizations permitting contributions up to $10,000/year (with a $40,000 lifetime limit on the extra amounts), even for employees who earn less than that. Obviously, they cannot make salary deferrals greater than their compensation, but the employer can make contributions on their behalf.

[mbozek]

A participant in a 403(B) plan who is subject to SS tax cannot contribute 100% of compensation to the 403(B) plan because FICA taxes must be withheld by the employer (7.65% of pay up to $84,900). State income tax (NJ and Pa) may also be withheld.

[Guest Yanikoski]

Just so there is no confusion, none of the limits ($11,000 on elective deferrals, $40,000 on total contributions, 100% of compensation) is directly reduced by Social Security or by income tax withholding. However, as a practical matter, the amount that can actually be taken out of the paycheck is limited by any other deductions that come off the top -- these can be Social Security, state tax withholding in certain states, union dues, deductions for cafeteria plans or other employee benefits, or anything else that, for any reason, comes "off the top." So employers and employees have to be careful about that, if they are thinking of contributing anywhere near 100% of their compensation. It is a point well worth making.