Employer Contributions in a 403(b) Plan on Behalf of a Deceased Employee

Q. Can an employer continue to make contributions on behalf of a deceased employee in a 403(b) plan?

A. Let’s assume that the question is based on the rule that employer contributions can be made for the 5-year period after separation from service (referred to as post-employment employer contributions). Up until the IRS issued the 403(b) regulations in 2007, we did not have an answer to your question. However, under the final 403(b) regulations, the IRS took the position that after the death of the participant, employer contributions are required to stop. (See IRS Publication 4483 at http://www.irs.gov/pub/irs-pdf/p4483.pdf)

Let’s look at an example. 

Example 1: Jane retires on June 30, 2020 at age 55. Her accrued sick and vacation is $50,000 and she has deferred a total of $19,500 for 2020. Her compensation in the “most recent period of service” from July 1, 2019 through June 30, 2020 is $60,000. The employer mandates that the accrued amounts be paid into the 403(b) through the year of termination plus 5 years after that.

For 2020, the maximum employer contribution is $57,000 – $19,500 or $37,500. Jane’s compensation is more than the $57,000 so the Section 415 test is met as well. The remaining amount of the accrued sick and vacation ($12,500) can be contributed in the following year, since it will not exceed the Section 415 limit nor the compensation of $60,000. 

Example 2: What happens if Jane dies? 

Let’s take the example one more step and assume that Jane dies on Feb. 2, 2021. The employer contribution is permitted through February 2021 (the month of death), determined as follows: Monthly Compensation is $60,000/12 or $5,000. Two months count in 2021. The contribution is therefore the lesser of:

1. $5,000 x 2 months = $10,000; or
2. the balance of the accrued sick and vacation or $17,500.

A final contribution of $10,000 can be made to the decedent’s 403(b) account in 2021 and must be made by 12/31/21. No further post-employment employer nonelective contributions can be made into the 403(b), nor can the remaining amounts be provided to the employee’s beneficiary.