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Taking it to the (Contribution) Limit

Linda Segal Blinn

Following federal tax law changes that went into effect in 2002, public schools and 501(c)(3) nonprofit organizations may offer their employees more than one type of defined contribution plan. But not all of these defined contribution plans follow the same Internal Revenue Code (IRC) limits.

Learn to separate fact from fiction to keep retirement plans operating within the IRC limits.

Fact: The annual deferral limit for a 403(b) plan is separate from the limit that applies to 457(b) plans.

IRC Section 402(g) sets the annual limit on elective deferrals to a 403(b) plan. That section requires that all pre-tax deferrals and designated Roth contributions made by an individual to all 403(b), 401(k), SIMPLE and SARSEP plans (regardless of whether these plans are sponsored by the same or related employer) in the same tax year cannot be more than the Internal Revenue Service’s annual limit on elective deferrals (in 2016, $18,000 before available catch-ups and subject to annual cost of living adjustments).

However, contributions to a 457(b) plan are subject to a different IRS limit. IRC Section 457(b) provides that the total annual vested contributions to a 457(b) plan cannot be more than 100% of compensation up to that year’s IRS annual dollar limit (in 2016, $18,000 before any available catch-up and subject to annual cost of living adjustments). For 457(b) plan purposes, pre-tax deferrals, Roth 457 contributions (if the 457(b) plan is sponsored by a governmental entity), and vested employer contributions all count toward that annual limit. And, as a reminder, only participants in a governmental 457(b) plan may use the age 50+ catch-up — the IRC does not permit 457(b) plans sponsored by nonprofit organizations to offer that catch-up.

What both annual limits do have in common is that the IRC provision is both a plan level limit and an individual limit. In other words, while a 403(b) plan or a 457(b) plan must not exceed the annual IRS limit, an individual participating in more than one 403(b) plan or more than one 457(b) plan in the same year cannot contribute a cumulative amount in the same tax year that is more than that permitted under the applicable IRS annual limit.

Fact: A participant in both a 403(b) plan and a 457(b) plan does not have to defer the maximum first to the 403(b) plan before contributing to the 457(b) plan.


There is no IRC provision that would require that a participant in both a 403(b) plan and a 457(b) plan exhaust the 403(b) plan’s annual deferral limit before contributing to the 457(b) plan.

If an employer’s plan documents provide for such a rule, this would be a matter of plan design (or, if the employer is a public school, perhaps it is a state or local law requirement). While a plan document cannot provide for more latitude than what is permitted under the IRC, that plan document can have more restrictive features than those imposed by the IRC.

Fact: The total of employer and employee annual contributions to a 457(b) plan is not subject to the 415(c) annual additions limit.

The 415(c) annual additions limit does not apply to 457(b) plans at all. Rather, total contributions that can be made to a 457(b) plan are governed by IRC Section 457(b), which provides that cumulative employee and vested employer contributions to the participant’s account under the 457(b) plan cannot be more than 100% of compensation up to that year’s IRS annual dollar limit (in 2016, $18,000 before any available catch-up and subject to annual cost of living adjustments). An employer offering a 457(b) plan with both employee and employer contributions will want to consider the impact of permitting employer contributions under that plan on those participants looking to make the entire contribution from pre-tax deferrals and/or Roth 457 contributions (to the extent that the 457(b) plan is sponsored by a governmental entity).

Fact: If an employer sponsors both a 403(b) plan and a 401(a) defined contribution plan, generally each plan is subject to a different 415(c) annual additions limit.

IRC Section 415(c) provides that the total of employer and employee contributions (other than the age 50+ catch-up contribution) cannot be more than 100% of compensation up to that year’s IRS dollar amount (in 2016, $53,000 and subject to annual cost of living adjustments). For purposes of the 415(c) annual additions limit, the individual is considered to be the “owner” of the 403(b) contract. As a result, all 403(b) contracts of an individual must be aggregated to a single 415(c) annual additions limit

This not only occurs if an individual invests contributions in more than one vendor’s contract under the same 403(b) plan. It may also arise if, for example, an employee participates in a voluntary 403(b) plan and an 403(b) optional retirement plan of that same college. In the alternative, this can also happen if an individual moves between two unrelated school districts in the same year and participates in each district’s 403(b) plan.

Since the individual is deemed the owner of the 403(b) contract, the contributions made to his employer’s 401(a) defined contribution plan typically are subject to a separate 415(c) annual additions limit. In other words, a participant in both his employer’s 403(b) plan and 401(a) defined contribution plan would have separate $53,000 annual additions limits for each of those plans.

However, there is an exception to this general rule. If an individual participating in a 403(b) plan also has an outside business that sponsors a defined contribution plan and that individual has more than a 50% ownership interest in that outside business. The IRS requires that contributions to the 403(b) plan and contributions to the outside business’ defined contribution plan on behalf of that participant be aggregated to a single 415(c) annual additions limit. According to the IRC 415 regulations, if the total contributions among those plans results in an excess of the annual additions limit, the excess is attributed to the 403(b) plan, not to the defined contribution plan.

As a best practice, an employer may consider soliciting from its employees each year whether any of its employees have an ownership interest in an outside business. Initially, this information could be received when the employee first completes a salary deferral agreement for the 403(b) plan. The employer can seek updated information from its employees through an annual questionnaire in order to coordinate IRC limits with those employees who indicated that they have an outside business.

Late last year, the IRS announced that its continued focus on auditing 403(b) plans in the 2016 fiscal year “because they have a historical pattern of non-compliance and also allow for greater coverage of the retirement plan participant universe.” Now, before the IRS audit arrives at the employer’s door, may be the time to review contribution limits procedures for 403(b) and 457 plans and update them as needed. As IRS have frequently noted, good internal controls and procedures mean a streamlined and focused IRS audit.

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.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.

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