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403(b) Internal Revenue Code Rules


Guest LenZ

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Guest LenZ

OK...I am very new to this field so please bear with me. I am a Benefits Administrator for a 501©(3) organization. I am having a hard time with the Internal Revenue Code and the 403(b). Here is my issue...

IRS Publication 571, Tax Sheltered Annuity Plans, states that "Maximum Allowable Contribution (MAC): For Tax years beginning after 2001, the maximum exclusion allowance (MEA) has been repealed, therefore your MAC is the lesser of the limit on annual additions or the limit on elective deferrals." I read this to mean that you are no longer limited to a percentage of your salary for a 403(b) and are limited to the lesser of the limit on elective deferrals (currently 12K) or annual additions (40K). I am being told that your 403(b) plan must adopt those changes. This is what does not make sense to me. If the Internal Revenue Code repealed the rule, how can a company limit the contribution to a lesser amount, say for instance 5K ( citing the MEA for example). Wouldn't that company now be in violation of the rules for a 403(b) and therefore, this would not qualify as a 403(b). Please note, we are following the IRC, but I am trying to make sure conceptually that I understand the law. Thanks!

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Guest LenZ
OK...I am very new to this field so please bear with me. I am a Benefits Administrator for a 501©(3) organization. I am having a hard time with the Internal Revenue Code and the 403(b). Here is my issue...

IRS Publication 571, Tax Sheltered Annuity Plans, states that "Maximum Allowable Contribution (MAC): For Tax years beginning after 2001, the maximum exclusion allowance (MEA) has been repealed, therefore your MAC is the lesser of the limit on annual additions or the limit on elective deferrals." I read this to mean that you are no longer limited to a percentage of your salary for a 403(b) and are limited to the lesser of the limit on elective deferrals (currently 12K) or annual additions (40K). I am being told that your 403(b) plan must adopt those changes. This is what does not make sense to me. If the Internal Revenue Code repealed the rule, how can a company limit the contribution to a lesser amount, say for instance 5K ( citing the MEA for example). Wouldn't that company now be in violation of the rules for a 403(b) and therefore, this would not qualify as a 403(b). Please note, we are following the IRC, but I am trying to make sure conceptually that I understand the law. Thanks!

Just to clarify my comment, I am being told that PRIOR to using this new rule, your plan must ADOPT these changes. This is what I do not understand. I dont believe that the IRC gives you an OPTION. The MEA was repealed...period. How can a organization continue to use it?

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How about the requirement that plans have to follow their terms? Plans can set lower limits than the IRS maximums. If the plan has established a lower limit, it must change the limit in order to allow the higher amount.

The reverse is not true. If the IRS limit is lower than what the plan provides, trouble ensues if the IRS limit is not respected.

I am not commenting on the details of the advice you got concerning timing of changes to the plan terms.

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The tax rules do not require a 403(b) plan document for a 403(b) plan and do not require that the terms of an existing 403(b) plan document be followed. The tax rules allow salary reduction contributions that exceed the limit in the plan document if the contributions do not exceed the limit in the IRC.

ERISA requires the plan administrator to follow the terms of an existing plan document, but there may be no harm in allowing salary reduction contributions in excess of those allowed by the plan document if the employer clearly communicates to all employees that the limits in the plan document no longer apply.

That said, the plan document should be updated to conform to current law. For example, a plan document that limits salary reduction contributions to less than allowed by the IRC might cause the plan to lose its ERISA exemption.

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Guest LenZ
The tax rules do not require a 403(b) plan document for a 403(b) plan and do not require that the terms of an existing 403(b) plan document be followed. The tax rules allow salary reduction contributions that exceed the limit in the plan document if the contributions do not exceed the limit in the IRC.

ERISA requires the plan administrator to follow the terms of an existing plan document, but there may be no harm in allowing salary reduction contributions in excess of those allowed by the plan document if the employer clearly communicates to all employees that the limits in the plan document no longer apply.

That said, the plan document should be updated to conform to current law. For example, a plan document that limits salary reduction contributions to less than allowed by the IRC might cause the plan to lose its ERISA exemption.

OK. Thank you. However, your last comment confused me even more. If you lose your ERISA exemption, aren't you now no longer a "403(b)"?

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