403b Limits Deferrals to 20%

[austin3515]

Someone just told me there 403b plan limits their contributions to 20% of pay. Corbel's 403b does mention that the "salary reduction agreement may reference minimum and maximum deferral limits."

I was surprised by this because of universal aviailibility. Is it OK to limit contributions? Someone making $20,000 will be limited to $4,000 of deferrals. Does that cause a problem?

[mbozek]

Someone just told me there 403b plan limits their contributions to 20% of pay. Corbel's 403b does mention that the "salary reduction agreement may reference minimum and maximum deferral limits."

I was surprised by this because of universal aviailibility. Is it OK to limit contributions? Someone making $20,000 will be limited to $4,000 of deferrals. Does that cause a problem?

403b plans are like 401k plans- plan may limit the % of comp or $ amt that employees can contribute to the plan even though there are no ADP % limits for HCEs to contend with. Universal availability allows employer to require more than $200 contribution per year.

[austin3515]

Why in the heck would a plan impose such a limit?? I agree that it's legal (I looked in a few other places), but I need to know why!! IT's gonna drive me nuts until I get an answer!!

[QDROphile]

Possible answers:

1. Section 415 limits.

2. Mistaken and obsolete carry over concept from taxable employer deduction limit.

[austin3515]

2. Mistaken and obsolete carry over concept from taxable employer deduction limit.

This was my guess too...

I suppose the 415 limit issue would be an obsolete carryover to from back in the days of the 25% limit. So long ago now, I can't even remember if 401k counted towards that limit? I was wee senior associate at an acconting firm back in those days!

[ETA Consulting LLC]

Austin,

I'm with you on this one. They really should change it. I see where the rules would say the employer must limit deferrals to preclude exceeding 415 and 402(g) limits; but appear silent on the ability to arbitrarily limit employees to lesser amounts. The question becomes on what authority would the employer have to arbitrarily limit employees to amounts significantly below the 415 and 402(g) limit.

It's just a bad provision; regardless of it's legality.

Good Luck!

[QDROphile]

The 415 limit issue is rational if the benefits are significant. By limiting the electives, that allows more employer contribution. But I suspect only a few people would have a 415 limit issue, and that would be better handled by counseling than an across the board limit.

[mbozek]

The 415 limit issue is rational if the benefits are significant. By limiting the electives, that allows more employer contribution. But I suspect only a few people would have a 415 limit issue, and that would be better handled by counseling than an across the board limit.

Other reasons for limiting employee contributions include making sure employees have enough wages to pay for health care, tax and FICA withholding, child support and other amounts withheld from pay b/c plan admin does not want to make decisions on priority of withholding amounts and having to deal with employee objections.