Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.
The amount that an employer can contribute is determined by the IRC §415(c) limitations on defined contribution plans. This limit is the same for 403(b) and 401(a) plans, however, 401(a) plans generally do not have employee contributions. In 2019 the limit for the sum of employer and employee contributions into a 403(b) plan is 100 percent of includible compensation capped at $56,000.1 That limit has increased from $40,000 in 2002 due to indexing in $1,000 increments and will continue to increase in future years. The age 50+ catch-up contribution does not reduce the 415(c) limit. Thus, the age 50+ employee eligible for the 15 plus years of service increase may defer a total of $28,000 in 2019 and the employer could make contributions equal to $37,000 ($56,000 minus $19,000). Taking into account the age 50+ catch up, the total amount available for contribution into a 403(b) account cannot exceed $62,000 in 2019.
All employees whose includible compensation exceeds the dollar limit can use the applicable dollar limit as their 415(c) limitation. However, employees whose income is less than the applicable dollar limit will be capped at 100 percent of their includible compensation. Remember that includible compensation is compensation earned in the most recent period that adds up to a full 12 months of service, minus mandatory pre-tax contributions to the employer’s other retirement plans.
It is also important to note that the regulations create a limitation on employer contributions made following the death of a former employee. As interpreted by the IRS, the regulations require post-employment compensation to accrue monthly upon death. The 415(c) limitation is applied based on compensation deemed to be earned at the rate of 1/12 of the actual annual includible compensation. For example, assume retiree John’s includible compensation is $60,000. He is credited with compensation earned at the rate of $5,000 per month following his retirement ($60,000/12). If John dies in March, his compensation for 415(c) purposes is limited to $5,000 x 3 months or $15,000 in the year of death. Thus, the contribution limitation for the year of death is 100 percent of his includible compensation, or $15,000. So, there is some risk that the full amount may not be contributed into the 403(b) account of a former employee who dies before receiving all of the benefit promised or anticipated.
Footnote
1.IRC §415(c) limit increased to $54,000 in 2017.
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