Are service accrual rates greater than one allowed?

[Guest Harvey Carruth]

Suppose that an employee of a public school district has more than one job classification/title and "accrues" aggregate full-time equivalent service in excess of 100% during a given taxable year. To be specific, suppose the employee holds one full-time position and another half-time position simultaneously, both positions with the same employer. I have searched the Code, Regulations, and other resources, including these message boards, and have not found any citation that limits full-time equivalent service [as defined in Code Section 403(B)(4) and further discussed in Regulations Section 1.403(B)-1(f)] for a given taxable year to at most one year.

Code Section 403(B)(4)(A) comes close, when it states "one year for each full year during which the individual was a full-time employee of the organization purchasing the annuity for him," then goes on in 403(B)(4)(B) to briefly describe the accrual of service under various scenarios in which an employee works less than one full year as a full-time employee. However, the logic used in describing how years of service should be calculated in both the Code and the Regulations suggests that "more than one year of service should be accrued for each full year during which the individual was employed at more than full-time equivalent." Moreover, I don't see anything in the wording of the cited Code and Regulations sections that prohibit accrual of more than one year of service during a single taxable year.

The following hypothetical example illustrates the potential impact of allowing accrual of years of service at rates greater than one per taxable year:

Eligible "Employee" works for qualified organization [see Code Section 402(g)(8)] for 10 calendar years in two positions, one full-time with compensation of $40,000 and another half-time with compensation of $20,000. To simplify the example, it is unrealistically assumed that there were no variations in compensation or contributions over the ten-year period. Elective 403(B) deferrals of $5,000 were made each of the first nine years, and Employee did not participate in any other pension or retirement savings programs. The following are calculations of general limitation election maximum allowable contributions for the 10th year of employment under the two scenarios in question (calculations for taxable/calendar year 2001):

Allowing accrual of at most one year of service in a given taxable year:

402(g) Elective Deferral Limit = $10,500 (less than 15 years of service)

403(B) Exclusion Allowance = .2 * $60,000 * 10 - $45,000 = $75,000

415©(1)(A) Dollar Limit = $35,000

415©(1)(B) Compensation Limit = .25 * $60,000 = $15,000

General Limitation Election MAC = $10,500

Allowing accrual of more than one year of service in a given taxable year:

402(g) Elective Deferral Limit = $13,500 (see explanation below)

403(B) Exclusion Allowance = .2 * $40,000 * 15 - $45,000 = $75,000

415©(1)(A) Dollar Limit = $35,000

415©(1)(B) Compensation Limit = .25 * $60,000 = $15,000

General Limitation MAC = $13,500

Notice in the second scenario that 15 years of service have been accrued by the end of the 10th calendar year of employment, so Employee becomes a qualified employee [as defined in Code Section 402(g)(8)] and becomes eligible for up to an extra $3,000 elective deferral. Also, even though Employee has contributed $5,000 per calendar year, $5,000 times years of service is $75,000, which substantially exceeds the $45,000 total of elective deferrals in prior years for purposes of Code Section 402(g)(8)(A)(iii). Hence, the 402(g) elective deferral limit for this employee is $13,500 for 2001.

In the second scenario, it should be observed that in the calculation of the 403(B) exclusion allowance, the most recent period that may be counted as one year of service is only two-thirds of a calendar year, so includible compensation is reduced to two-thirds of the corresponding annual figure. Also, it is interesting to note that the 415©(4)(B)(i) modified compensation limit for the B Election [.25 * $40,000 + $4,000 = $14,000] is less than the 415©(1)(B) standard compensation limit [.25 * $60,000 = $15,000].