Balloon Payments

[jlf]

Are elective deferrals in the form of balloon payments permitted?

[Carol V. Calhoun]

Yes, assuming the plan language allows for them. The only thing you have to watch out for is that it is my understanding (haven't looked at this recently enough to know if there is authority) that if the elective deferrals come from income which accrued before the date of the election, you have a problem. For example, suppose someone was entitled to an annual bonus at the end of the year, and made an election in December to have the entire 403(B) deferral for the year made out of that bonus. You could have an issue here, because most of the bonus would have been earned before the date of the election. This would not be a problem if the deferral was elected at the beginning of the year, even if it was all taken out of the bonus. Also, the same result might be accomplished by making the deferral out of the portion of the December paycheck which had not yet been earned, and then using the bonus for the living expenses the paycheck would otherwise have covered.

[M R Bernardin]

I believe SBJPA or TRA '97 put 403(B)'s on the same footing as 401(k)'s when it comes to deferral rules, so that any amounts can be deferred as long as the election to defer is made before the amounts are otherwise made available/paid. When calculating the exclusion allowance, however, only amounts earned during the most recent "one year of service" count, so any amounts paid during the current year attributable to service rendered before the current year would have to be excluded.

[jlf]

Both of you have confirmed my understanding of the law. Thank you kindly.