Former Employees

[Guest BED]

I am perplexed. The definition of "includible compensation" appears to allow contributions to a 403(b) for five years after an employee's termination of employment. The 403(b) explanation at irs.gov confirms that understanding.

On the other hand, RIA has the same definition for includible compensation but then (citing the regulations) indicates that the exclusion does not apply to former employees. What am I missing? Can a contribution be made by the former employer which is taxable income as contributed?

[TLGeer]

I am perplexed. The definition of "includible compensation" appears to allow contributions to a 403(b) for five years after an employee's termination of employment. The 403(b) explanation at irs.gov confirms that understanding.

On the other hand, RIA has the same definition for includible compensation but then (citing the regulations) indicates that the exclusion does not apply to former employees. What am I missing? Can a contribution be made by the former employer which is taxable income as contributed?

You're right the first time. The 403(b) rules have specific provisions that allow contributions after employment termination. These can be pre-tax.

[Guest BED]

Thanks.

It would be a lot more comforting if the regulations listed "former employees with includible compensation" as one of the exceptions to the general rule that former employees do not qualify for the exclusion. At least I did not see that exception.

[John Feldt ERPA CPC QPA]

Bryan,

I think this may help. Suppose a government university 403(b) plan covers the rugby coach and the plan provides that employer contributions of $24,000 per year will continue for 5 years after severance from employement (assume he makes more than that in pay before he severs employment).

Does Treasury Regulation 1.403(b)-3(b)(4) mean these allocations for the 5 extra years are taxable to the coach each year even though they were contributed to the plan?

No, it does not. Regulation 1.403(b)-3(b)(4) says that "except as provided . . . in §1.403(b)-4(d)", the exclusion from gross income does not apply.

Therefore, you must also look at §1.403(b)-4(d), which indicates that nonelective contributions may be made for former employees based on their deemed includible compensation through the end of the year of termination and the next 5 years. Those nonelective contributions would be excludable from compensation, the same as any nonelective contribution to a 403(b) plan.

§1.403(b)-4 Contribution limitations.

(d) Employer contributions for former employees--(1) Includible compensation deemed to continue for nonelective contributions. For purposes of applying paragraph (b) of this section, a former employee is deemed to have monthly includible compensation for the period through the end of the taxable year of the employee in which he or she ceases to be an employee and through the end of each of the next five taxable years. The amount of the monthly includible compensation is equal to one twelfth of the former employee’s includible compensation during the former employee’s most recent year of service. Accordingly, nonelective employer contributions for a former employee must not exceed the limitation of section 415©(1) up to the lesser of the dollar amount in section 415©(1)(A) or the former employee’s annual includible compensation based on the former employee’s average monthly compensation during his or her most recent year of service.

§1.403(b)-3 Exclusion for contributions to purchase section 403(b) contracts.

(b) Application of requirements--

(4) Exclusion limited for former employees--(i) General rule. Except as provided in paragraph (b)(4)(ii) of this section and in §1.403(b)-4(d), the exclusion from gross income provided by section 403(b) does not apply to contributions made for former employees. For this purpose, a contribution is not made for a former employee if the contribution is with respect to compensation that would otherwise be paid for a payroll period that begins before severance from employment.

(ii) Exceptions. The exclusion from gross income provided by section 403(b) applies to contributions made for former employees with respect to compensation described in §1.415©-2(e)(3)(i) (relating to certain compensation paid by the later of 2 ½ months after severance from employment or the end of the limitation year that includes the date of severance from employment), and compensation described in §1.415©-2(e)(4), §1.415©-2(g)(4), or §1.415©-2(g)(7) (relating to compensation paid to participants who are permanently and totally disabled or relating to qualified military service under section 414(u)).

You can call me if you want to discuss.

-John

[Guest BED]

Thanks John. I'll study it.