Involuntary IRC Section 403(b) Contributions

[bzorc]

A school teacher taxpayer has come to me with the following question:

Teacher is retiring in June of 2012. The school district, as part of the current contract, has agreed to pay the teacher an amount equal to $1,000 per year of service. Teacher has 32 years of service, thus a payment of $32,000. However, the contract provides that the payment must be made to a 403(b) plan. School has an employee contribution only 403(b) plan in place, and teacher is currently deferring $1000 per month to a long standing annuity under the terms of the plan. The teacher, while retiring in June, is paid through August 31, 2012; thus, will have $8,000 of elective deferrals through then.

The teacher contacted the 403(b) plan provider that administers the annuity being utilized. The provider said that since the $32,000 payment is an "Involuntary contribution" to a 403(b) plan, that the IRC limit on contributions is increased to $50,000, from the $22,500 limit. Therefore, the entire payment and current deferrals ($32,000 plus $8,000) are within the IRC limits for 2012.

The current financial officer of the school has never heard of this and is asking to see the rules regarding IRC 403(b) involuntary contributions in writing. Could anybody please point me to where this is contained in the IRC 403(b) regulations?

Thanks for any replies!

Duh!!!! The limit is the annual addition limit. Tax season has mushed my brain!

[mbozek]

A school teacher taxpayer has come to me with the following question:

Teacher is retiring in June of 2012. The school district, as part of the current contract, has agreed to pay the teacher an amount equal to $1,000 per year of service. Teacher has 32 years of service, thus a payment of $32,000. However, the contract provides that the payment must be made to a 403(b) plan. School has an employee contribution only 403(b) plan in place, and teacher is currently deferring $1000 per month to a long standing annuity under the terms of the plan. The teacher, while retiring in June, is paid through August 31, 2012; thus, will have $8,000 of elective deferrals through then.

The teacher contacted the 403(b) plan provider that administers the annuity being utilized. The provider said that since the $32,000 payment is an "Involuntary contribution" to a 403(b) plan, that the IRC limit on contributions is increased to $50,000, from the $22,500 limit. Therefore, the entire payment and current deferrals ($32,000 plus $8,000) are within the IRC limits for 2012.

The current financial officer of the school has never heard of this and is asking to see the rules regarding IRC 403(b) involuntary contributions in writing. Could anybody please point me to where this is contained in the IRC 403(b) regulations?

Thanks for any replies!

Duh!!!! The limit is the annual addition limit. Tax season has mushed my brain!

Unlike 401k plan elective deferrals, there is no requirement that employee 403b contributions be voluntary. At many colleges the 403b plan provides for mandatory employee contributions as a condition of employment or as part of the CB agreement with the union which are matched by the employer. Compare reg 1.401(k)-1(a)(2)- CODA is an arrangement under which an eligible employee may make a CODA election with reg. 1.403(b)-3(a) which lists 9 requirements for elective deferrals but omits any requirement that employee must have discretion to make election.

[QDROphile]

The contribution is a non-elective employer contribution to the plan. The deferral limits do not apply, so there is no need for an increase in the limit or an exception. It is unfortunate that anyone is using terms to the effect that the employer is "paying the teacher" $32,000. That is causing the confusion and they get to get off of that bus. If they are required to start with "paying the teacher," the analysis gets much more complicated. In any event. it sounds like the plan needs amendment to allow the contribution. It would be nice if the school is a public school, too, to avoid thinking about other issues.