Strategy to Increase Maximum Contributions

Written by Eva A. Rasmussen

For 2016, contributions to a stand-alone defined contribution plan are limited to $53,000 plus, in the case of a participant who reaches age 50 by the end of 2016, additional salary deferral contributions of $6,000 ("Catch-Up Contributions"). However, by utilizing a combination of plans qualified under Sections 401(a) and 403(b) of the Internal Revenue Code ("IRC"), contributions may be as high as $77,000 as shown below:

  Stand-Alone
401(a) or
403(b) Plan
Combined
401(a) and
403(b) Plans
Salary Deferrals $18,000 $18,000
Employer Contributions 35,000 53,000
Catch-Up Contributions 6,000 6,000
------------------------------------ -------------------- ------------------
Maximum Contributions $59,000 $77,000

I. Reason for the Difference in Maximum Contributions

The reason for this anomaly is that, in most cases, contributions to a 403(b) arrangement are not aggregated with contributions to an employer-sponsored plan established under IRC Section 401(a) (including a 401(k) Plan) for purposes of determining the maximum contributions permitted under IRC Section 415. The one exception is when the participant controls the employer. For example, if a doctor worked for a non-profit hospital that provided him with a 403(b) Plan and also maintained a private practice as a shareholder owning more than 50% of a professional corporation, any defined contribution plan of the professional corporation must be aggregated with the 403(b) Plan. No aggregation would be required if the same employer offered both plans.

II. Who May Establish a 403(b) Plan?

In order to establish a 403(b) Plan, the employer must be described in IRC Section 501(c)(3) which includes foundations and non-profit corporations organized and operated exclusively for one or more of the following purposes: charity, religion, education, science, literacy, testing for public safety, fostering national or international amateur sports competition and the prevention of cruelty to children or animals

403(b) Plans are subject to similar but different rules than plans qualified under IRC Section 401(a). For examples, salary deferral contributions under a 403(b) Plan are not subject to non-discrimination testing as they would be under a non-safe harbor 401(a) Plan.

III. Next Steps

If you are a non-profit employer or foundation eligible to establish a 403(b) Plan and you want to maximize retirement contributions and deferral opportunities for your employees, you should review your present defined contribution arrangement. If you currently only maintain a stand-alone 403(b) Plan or 401(a) Plan, consider if a combination of plans would maximize saving opportunities.

If you have any questions or would like assistance in determining if your plan documents comply with the cafeteria plan rules, please contact Eva Rasmussen (earasmussen@cbdm.com) or Richard Muser (rkmuser@cbdm.com), lead attorneys at CB&D's Employee Benefits, Executive Compensation and ERISA Litigation Group.

About the Author
Eva A. Rasmussen
Benefits Counsel
Eva A. Rasmussen concentrates on the design, implementation and communication of qualified plans and deferred compensation arrangements as well as...
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