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It all Adds Up: 415(c) Annual Additions Limit and 403(b) Plans

Internal Revenue Code Section 415(c) provides that the total of employee contributions (other than the Age 50+ Catch-up), employer contributions, and forfeitures allocated to a 403(b) participant’s account within the 12-month period (as defined by the 403(b) plan) is capped at 100% compensation up to a stated dollar amount determined each year by the IRS. In 2019, the dollar limit is $56,000 and is subject to annual cost of living adjustments in $1,000 increments.

While this conceptually sounds simple, determining the 415(c) annual additions limit requires additional information if an individual contributes to more than one 403(b) product or participates in more than one defined contribution retirement plan. 

What You Need to Know About Plan Aggregation

The Code provides that the 403(b) plan participant is considered to be the “owner” of the 403(b) contract, meaning that, as a general rule:

  • All 403(b) contracts of an individual be aggregated to a single 415(c) annual additions limit (regardless of the employer sponsoring the 403(b) plan); and
  • An individual who participates in a 403(b) plan and in a defined contribution plan in the same year has two 415(c) annual additions limit – in other words, his accounts under the 401 and 403(b) plans are not aggregated, even if those plans are sponsored by the same employer.

There is an exception to this “no aggregation” rule among 403(b) and other DC plans. If a 403(b) participant has an outside business that sponsors a 401 DC plan or Simplified Employee Pension (SEP) and that 403(b) participant has more than a 50% ownership interest in that outside business, contributions to the individual’s account under the 403(b) plan and contributions to his account under the outside business’ DC plan must be aggregated to a single 415(c) annual additions limit. If the 415(c) annual additions limit is exceeded, the IRS regulations provide that the excess is attributed to the 403(b) plan, not to the DC plan.

When to Make Corrective Distributions

The IRS regulations provide that if a 403(b) participant has an excess over the 415(c) annual additions limit, that excess (plus attributable earnings) are includible in the participant’s gross income in for the tax year in which the excess contribution occurred. If an excess amount is not timely corrective by the end of the year in which the excess was contributed, the amount should be tracked separately from 403(b) amounts. According to IRS Revenue Procedure 2019-19, Section 5.02(3), “A contribution in excess of the limitation of § 415(c) is not an Excess Amount (or a 403(b) Failure) if that excess is maintained in a separate account in accordance with the rules in the regulations under §§ 403(b) and 415. Such separate account is considered to be a § 403(c) annuity contract (or, if applicable, an amount to which § 61, 83, or 402(b) applies).”

To avoid this harsh result, the IRS’ Employee Plans Compliance Resolution System, currently found in Revenue Procedure 2019-19, Section 6.06(4) (available at https://www.irs.gov/pub/irs-drop/rp-19-19.pdf) permits an employer to take “reasonable steps to have the Overpayment repaid to the plan, adjusted for Earnings at the plan’s earnings rate from the date of the distribution to the date of the correction of the Overpayment.”

Best Practices for 403(b) Plan Sponsors

In Issue Snapshot 403(b) Plan -- Plan Aggregation in Determining Compliance with IRC Section 415(c) (available at https://www.irs.gov/retirement-plans/403b-plan-plan-aggregation-in-determining-compliance-with-irc-section-415c), the IRS notes, “This issue is frequently found during examinations of 403(b) plans maintained by governmental and tax exempt healthcare entities and colleges/universities. This is because many of the healthcare doctors and the university professors maintain a practice outside of the entity that is the general 403(b) plan sponsor.”

To reduce the likelihood of such excesses arising, an employer should consider implementing internal controls to monitoring the 415(c) annual additions limit. Best practices may include annually soliciting information from employees about their outside ownership interests and regularly coordinating on contribution limit monitoring with plan service providers (including third party administrators) throughout the year so that corrective distributions can occur before year end. 

For more on 415 limits and 403(b) plans, see the IRS 403(b) Examination Guidelines at Section 4.72.13.12 (available at https://www.irs.gov/irm/part4/irm_04-072-013#idm140351478467264).


Linda Segal Blinn, J.D.*, is vice president of Technical Services for Tax-Exempt Markets at Voya Financial. In this capacity, Blinn leverages over 30 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.