Questions RE 403(b) and 401(k) maximum contribution interactions and e

[Guest Rick N]

I have a few difficult questions about contribution limits to a combination of 401(k) and 403(B) plans. My spouse works as a professor in a public university in NC. There are two retirement plan options: 1) the state defined benefit retirement plan 2) the defined contribution plan for only EPA (exempt from personnel act) employees (academic staff and administrators), a 403(B). The State of NC also has the “Supplemental Retirement Income Plan of North Carolina,” a 401(k) plan, which all state employees can contribute to. From what I understand this is a “grandfathered” 401(k) plan. There are only employee contributions to the 401(k) plan. The 403(B) plan, which s/he joined with TIAA/CREF, has 6% mandatory employee and 6.66% employer contributions of salary.

I have been told that s/he can also contribute up to 20% or $10,500 (the maximum elective deferral) to the 401k. I also was told that the amounts contributed to the 403(B) RA did not count toward the maximum elective deferral because 1) this was in lieu of the state defined benefit plan and did not count 2) the 401k plan was grandfathered. However, I was told if s/he contributed to what TIAA/CREF calls “Supplemental” SRA 403(B)s (GSRAs) then that would offset any contributions to the state 401(k) plan and fall under the $10,500 combined limit for 2000. Is what I have been told accurate, especially the 401k limits? (BTW we have maxed out the 401k under this advice for several years.)

To make matters even more complicated: My spouse has a semester visiting appointment at another public university out of state which in addition to his/her normal appointment in NC is paying some top-up salary. They have offered to contribute to a 403(B) on his/her behalf for this extra salary. (Hence, my spouse has two employers.) Their retirement plan has immediate vesting in the ORP 403(B) (TIAA/Cref also) and the institution contributes roughly 10% of his/her salary but does not have employee matching. They do offer the option to make “voluntary” additions to 403(B) (I assume GSRAs?) but they state that “The aggregate of employer contributions and voluntary employee contributions cannot exceed the IRS Code 403(B)2, 415©, and 402(g) limits.” This situation raises further questions. 1) is my spouse eligible for two 403(B) plans at the same time? 2) If so, how does the second 403(B) plan effect the first 403(B) plan (if at all) at his/her primary institution in NC? 3) How does the second 403(B) plan affect the 401(k) contribution limits (if at all) at the primary institution? As one can imagine this situation is novel (and difficult) for most HR officers. Many thanks for any assistance.

[Guest Harvey Carruth]

The University of Tennessee also has one grandfathered 401(k) plan and the FERS TSP to go along with its 403(B) plan, three 401(a) pure defined benefit plans, one 401(a) hybrid plan, and a 457 plan. My fifteen years of responsibility for calculating maximum allowable combinations of contributions to these plans is the basis for my responses to these most interesting questions.

First of all, it is important to say that the responses I give below are based on what is called the "General Limitation Election" for 403(B) contributions. That is, it will be assumed that your wife will not exercise the A, B, or C Elections authorized by IRC 415©(4). Also, I will assume that she is not eligible for any "extra elective deferrals" authorized by IRC 402(g)(8) as a consequence of having 15 years of full-time equivalent service with a current employer that sponsors a 403(B) plan. Finally, I will assume that she is not "in control" of any of her employers and that she does not have a private practice of any kind (see Treas. Regs. 1.415-7(h)(2)(i), 1.415-7(h)(2)(iii), and 1.415-8(d)(2)). If any one of these assumptions is incorrect, then the analysis becomes much more complicated.

With the provisos listed in the previous paragraph, under current law the following observations are pertinent to the questions you ask:

A) The 403(B) defined contribution plan for EPA is commonly called an Optional Retirement Plan (ORP). Tennessee has a similar plan as an alternative to the state 401(a) defined benefit retirement plan, but it is qualified under 401(a). The 6% mandatory salary reduction contribution is not considered to be an elective deferral, so it is not subject to the 402(g) elective deferral limit. However, the aggregate of the 6% mandatory contribution and the 6.66% employer discretionary (non-salary-reduction) contribution is subject to the 403(B)(2)(A) Exclusion Allowance Limitation on nonforfeitable contributions and the 415©(1) Limit on Annual Additions to the 403(B) plan of the public university in NC.

b) Contributions to the 401(k) plan are elective deferrals and are subject to the 402(g) Elective Deferral Limit. Moreover, these contributions are subject to a separate 415©(1) Limit on Annual Additions to the 401(k) plan, based on the provisos specified above.

C) The type of contributions to the 403(B) plan at the other public university are in doubt based on what you have said. If the contributions are made by salary reduction, then unless such contributions are subject to a one-time irrevocable election, they are considered elective deferrals and must be aggregated with all other elective deferrals to 403(B) and 401(k) plans of all employers when applying the 402(g) Elective Deferral Limit (that is, the elective deferral limit is employee-specific). I will assume that the contributions to which you refer are made subject to a one-time irrevocable salary reduction agreement. Certainly if your wife exercises the option to make "voluntary" contributions in addition to these "mandatory" salary reduction contributions, such "voluntary" contributions would be elective deferrals and would be subject to the 402(g) Elective Deferral Limit.

The statement made by the other public university that: "The aggregate of employer contributions and voluntary employee contributions cannot exceed the IRS Code 403(B)(2), 415©(1), and 402(g) limits." is correct. Moreover, any voluntary employee contributions must be aggregated with elective deferrals to the 403(B) and 401(k) plans of the public university in NC. Now for the answers to your specific questions:

Question 0) Is what I have been told accurate, especially the 401k limits?

Answer: Almost. Actually she can contribute up to 23.5% of gross salary to the 401(k) plan, up to $10,500. The IRC 415©(1)(B) limit is "25% of the participant's includible compensation," but gross salary is reduced by the 6% mandatory contribution to the 403(B) plan, so the resulting limit is 25% of 94% of gross salary, which is 23.5%. It is true that the amounts contributed to the 403(B) RA do not count toward the maximum elective deferral, but this is because they are not elective deferrals. The statement that supplemental SRA 403(B)s would offset any contributions to the state 401(k) plan is not technically correct. It is true that such supplemental SRA contributions would be elective deferrals, and thus would have to be aggregated with 401(k) plan elective deferrals when applying the 402(g) Elective Deferral Limit (see further discussion of aggregation of elective deferrals below). However, separate 415©(1) limits are applied to annual additions to the 403(B) and 401(k) plans. Moreover, the 403(B) Exclusion Allowance Limitation applies only to the 403(B) contributions.

Question 1) Is my spouse eligible for two 403(B) plans at the same time?

Answer: Yes.

Question 2) If so, how does the second 403(B) plan affect the first 403(B) plan (if at all) at his/her primary institution in NC?

Answer: It doesn't, since there are no elective deferrals into the 403(B) plan at the state university in NC.

Question 3) How does the second 403(B) plan affect the 401(k) contribution limits (if at all) at the primary institution?

Answer: Voluntary/elective deferrals to all 403(B) and 401(k) plans of all employers must be aggregated, and the aggregate elective deferrals cannot exceed the 402(g) Elective Deferral Limit. Hence, the maximum total voluntary/elective contributions is $10,500, subject to the other applicable limits (403(B) limit on nonforfeitable contributions and the 415 limit on annual additions).

Your Observation: As one can imagine this situation is novel (and difficult) for most HR officers. Many thanks for any assistance.

Response: Yes, it is. I hope my responses help.

[Guest Rick N]

Dear Harvey

Many many thanks for your assistance.