Skip to main content

You are here

Digging Deep: How Does the 15 Year of Service Increased Limit Really Work?

This article originally ran on July 21, 2015.

Ellie Lowder, TGPC, Consultant

The IRS has said that excess deferrals generally are caused by “misuse” of the 15+ years of service increased limit outlined in Internal Revenue Code Section 402(g)(7). This article is intended to help provide clarity on how it works.

In the meantime, the IRS has said verbally that many K-12 employers have chosen not to permit use of that increased limit in their plans, while most higher education employers do offer it. While this statement has not been further verified, other reports seem to indicate it is true. This brings up the first of the following points.

The 15+ Year of Service Limit Is Optional. Plans can choose not to permit it. However, if it is permitted for any employee, it must be permitted for all employees. While there doesn’t appear to be specific regulation addressing that, the examination guidelines do point that out. We have seen some employers that have offered the option in the past, but now wish to phase it out — permitting employees who have been using it to continue to do so, while not permitting other employees to use it. That is a violation of the universal availability rules.

Financial advisors wishing to make the option available to their prospects and clients will need to assure the employer that the limit will not be permitted unless a calculation supporting it is done. Most product providers and TPAs have software supporting the calculation.

Types of Employers Eligible to Include it as an Option. Not all 403(b) eligible employers are qualified organizations for purposes of the Section 402(b)(7) increased limit. Qualified organizations are educational organizations (which Internal Revenue Code Section 170(b)(1)(A)(ii)) defines as hospitals, and health and welfare services agencies, including home health services agencies, church–related organizations, and other religious organizations described in Internal Revenue Code Section 414(e)(3)(B)(ii)). Thus, organizations such as zoos, museums and symphonies are likely not eligible to use the 15+ year of service.

How Does the Increased Limit Work? An otherwise eligible employee can only use the increased limit if calculations reveal that:

1.      The employee will have 15 or more years of service by the end of the tax year in which it will be used.

2.      It can be used only if contributions to all elective deferral plans of this employer (including contributions to the employer’s 457(b) plan made in years before 2002) do not exceed an average of $5,000 or more. Thus, if an employee will attain 15 years of service by the end of 2015, all contributions made by the end of 2014 must be added together, and, if $75,000 or more, prohibits the use of the increased limit.

3.      Only $15,000 in extra amounts with the current employer can be used for the increased limit. And — adding to the difficulty is the fact that the final 403(b) regulations require that any contributions made for the age 50+ catch up option for employees also eligible to use the 15+ years of service option will first count toward the $15,000 available under it.

4.      The maximum available for the 15-year increased limit is $3,000 annually, not indexed.

All Information Must Be Available. It is essential that information on past contributions during all years of service with this employer be available. If it is not available, those performing calculations should not permit employees to use the increased limit.

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