IRS Updates Info About Aspects of 430(b) Aggregation

The IRS has updated the information it provides concerning an aspect of aggregation of a 403(b) plan. Specifically, it addresses the application of Code Section 415(c) when a 403(b) plan is aggregated with a 401(a) plan. 

Section 415(c)

In this Issue Snapshot, the IRS notes that Section 403(b) provides an exclusion from gross income for amounts contributed to the purchase of a 403(b) annuity contract if certain requirements are satisfied. One is the requirement that the contributions and other additions to the contract do not exceed the limitations under Section 415(c). 

Section 415(c) generally limits annual additions to the lesser of the dollar limit in effect for the year, as adjusted for cost–of-living increases, or 100% of a participant’s compensation. Contributions made to all defined contribution plans of an employer are combined in applying the limitation under Section 415(c). 

Aggregation 

Generally, 403(b) participants are each considered to have exclusive control over their own annuity contract. Because the participant is considered to control and maintain the annuity contract, contributions to the 403(b) annuity contract are generally not aggregated with contributions to any other DC plan qualified under Code Section 401(a).

An exception, however, is that a participant’s 403(b) annuity contract will be aggregated with one or more DC plans when that particular participant is deemed to control the employer sponsoring the DC plan qualified under Section 401(a). 

If a 403(b) annuity contract is aggregated with a DC plan qualified under Section 401 (the sponsor of which is controlled by the 403(b) annuity holder), then both plans must satisfy the Section 415(c) limitation separately and also on an aggregate basis.

Audit Tips

The IRS says that issues can arise during examinations of 403(b) plans maintained by governmental and tax-exempt healthcare entities and colleges/universities. This, it says, is because many university professors and medical doctors maintain practices outside of the entity that is the general 403(b) plan sponsor. 

The IRS offers a variety of tips relevant to audits in the context of aggregation of 403(b) plans. 

• Review the plan documents and summary plan description to determine the types of contributions provided under the plan.
• Review the plan language for compliance with Section 415(c).
• Review the employer’s internal controls to determine the employer’s policy regarding outside employment. If outside employment is not permitted, the agent may consider plan aggregation a low audit risk. 
• If the employer is silent about—or permits—outside employment, determine the procedures used to inform employees about the aggregation rule, and review any notices, forms or other written communications containing that information.
• Review any information employees must provide to the employer regarding outside employment and plan contributions.