Pick ups403(b)and 415

[Guest gaham]

I have a client that participates in a state retirement system (a defined benefit plan that has pick up contributions under 414(h)(2)) but also maintains a 403(B) plan. Does anyone have any thoughts re whether the pick up contributions count as an annual addition under the 415© limits that would apply to the 403(B) plan? Since pick ups are treated as employer contributions it seems logical and consistent with the statutes to treat them as employer contributions to a defined benefit plan. Thus, the pick up would not be treated as an annual addition under 415© but the benefit attributable to it would be counted for purposes of 415(B) and 415(e).

[Guest CVCalhoun]

Welcome to the board, gaham!

Actually, there are two responses to your question. First, a state retirement system is not aggregated at all with a 403(B) plan in calculating the 415 limits unless the participant makes the election provided in IRC § 415©(4)©. IRC § 415(e)(5); Treas. Reg. § 1.415-8(d)(2). (Of course, the picked up contributions to the state system, like all other employer contributions to qualified plans, are taken into account in calculating the maximum exclusion allowance under IRC § 403(B); see Treas. Reg. § 1.403(B)-1(d)(4) for the gory details.)

Second, if the state retirement system and the 403(B) plan have to be aggregated due to an IRC § 415©(4)© election having been made, you are in general right about the treatment of the picked-up contributions. The only exception would be if the picked up contributions, instead of just going into the calculation of the defined benefit, were credited with actual trust earnings. (I am aware of at least one state system in which this is true, and in which the ultimate benefit from the state system is equal to the greater of the defined benefit amount or the picked-up contributions plus actual plan earnings.) In such an instance, the plan would be a hybrid plan within the meaning of IRC § 414(k), and the picked up contributions would be treated as contributions to a separate defined contribution plan, subject to the IRC § 415© annual addition limits. Treas. Reg. § 1.415-2©(2).