Linda Segal Blinn, J.D.
Notifying 403(b) plan participants of annual additions limit rules under Internal Revenue Code Section 415(c) (415(c) annual additions limit) may not be just a best practice — it may be an affirmative obligation in the employer’s 403(b) plan document.
A 403(b) participant — not the employer is considered the owner of the 403(b) account when applying the 415(c) annual additions limit to the participant’s 403(b) account. As a result, all of an individual’s 403(b) accounts (including those under 403(b) plans maintained by other employers) are aggregated to a single 415(c) annual additions limit. In addition, if a 403(b) participant also has a controlling interest (defined as more than 50%) in an outside business, the participant’s 403(b) account and the account under that outside business’ defined contribution plan (including 401 defined contribution plans and simplified employee pensions) must individually, and on an aggregated basis, satisfy the 415(c) annual additions limit. Based on recent audits of 403(b) plans, the IRS has noted that “many of the healthcare doctors and the university professors maintain a practice outside of the entity that is the general 403(b) plan sponsor.”
In the issue snapshot “403(b) Plan — Plan Aggregation in Determining Compliance with IRC Section 415(c)” posted on August 22, 2017, the IRS identifies internal controls an employer can take to ensure that the 403(b) plan’s 415(c) annual additions limit is not exceeded. Action steps include determining whether a 403(b) plan sponsor has a policy regarding outside employment and assessing the procedures the 403(b) plan sponsor uses to inform employees about the special 415(c) annual additions aggregation rule if the employer’s policy either permits outside employment or does not address this topic.
The IRS’ 403(b) List of Required Modifications (LRMs), sample plan provisions are leveraged by 403(b) plan drafting providers, add another step to an employer’s internal controls by incorporating an affirmative obligation for 403(b) plan sponsors to provide annual notice of this 415(c) aggregation requirement. Section 1.4 of LRM 38 (Limitation on Annual Additions) requires the plan administrator (which generally is the employer, unless otherwise noted in the 403(b) plan document) to “provide written or electronic notice” to 403(b) plan participants that explains these special 415(c) aggregation rules. The 415(c) notice, which should be drafted “in a manner calculated to be understood by the average Participant,” must inform 403(b) participants of:
- the Internal Revenue Code requirement to aggregate plans in which an individual has a controlling interest for purposes of the Section 415(c) annual additions limit;
- their responsibility to provide information about any outside businesses in which the participant may have a controlling interest; and
- the failure of the 403(b) participant to provide necessary and correct information to the plan administrator “could result in adverse tax consequences to the Participant, including the inability to exclude contributions to the Plan under section 403(b) of the Internal Revenue Code.”
LRM 38 provides that the notice must be given annually, starting no later than the first year that an employee becomes a participant in the 403(b) plan.
How can an employer effectively provide an annual 415(c) notice, whether expressly required by the 403(b) plan document or furnished as a matter of best practice?
First, the 403(b) plan sponsor should determine an appropriate communication method(s) — electronic and/or written. Keep in mind that not all plan participants — for example, custodial staff or cafeteria workers — may have access to email or intranet websites at the worksite. If that is the case, the employer may want to consider either providing all 403(b) participants with a written annual notice, or taking a bifurcated approach, such as furnishing an email-only notice to those 403(b) participants with access to email at work and providing a written notice to all other participants.
Once the communication method has been decided, an employer may want to consider leveraging existing required communications to include the 415(c) notice. Newly hired employees who are eligible to participate in the 403(b) plan could receive the 415(c) notice as part of the “new employee welcome package,” along with the IRS W-4 form and benefits election forms. All other 403(b) participants could, get the notice as part of communications already provided annually, such as an employee handbook, employee code of conduct, universal availability notice, or employee benefits summary.
Finally, as a best practice, the employer must document that the annual 415(c) notice was provided, together with a listing of the 403(b) participants to whom that notice was sent and any steps implemented if a participant informed the 403(b) plan sponsor of an outside employer and outside plan contributions. The IRS continues to emphasize the importance of a 403(b) plan sponsor maintaining good internal controls for its plan. Implementing strong internal controls for providing and acting upon a 415(c) notice may help keep an IRS’ audit of the 403(b) plan from being prolonged.
The IRS’ “403(b) Plan — Plan Aggregation in Determining Compliance with IRC Section 415(c)” issue snapshot can be found at https://www.irs.gov/retirement-plans/403b-plan-plan-aggregation-in-determining-compliance-with-irc-section-415c
. The IRS’ 403(b) LRMs can be found at https://www.irs.gov/pub/irs-tege/403b_lrm0313.pdf
.Linda Segal Blinn, J.D.*, is vice president of Technical Services for Tax-Exempt Markets at Voya Financial. In this capacity, Blinn leverages over 25 years of experience administering and designing defined contribution plans to provide general legislative and regulatory information to assist public and non-profit employers in operating their retirement plans.
This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.
* Linda is not a practicing attorney for Voya Financial.