Contributions

<div class="Section1"><br /> <br /> The safe harbor rules for automatic contribution plans with respect to 401(k) plans also apply with respect to matching contributions under a 403(b) annuity through the application of IRC Section 403(b)(12) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3762">3762</a>). This provision is effective for years beginning after<br /> December&nbsp;31, 2007.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&sect;&nbsp;401(k)(13), 401(m)(12), 414(w).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Under the final regulations, a plan-to-plan transfer from a 403(b) plan to another 403(b) plan is permitted if each of the following conditions is met:<br /> <p style="padding-left: 40px;">(1)  the participant is an employee or former employee of the employer for the receiving plan or, in the case of a transfer for a beneficiary of a deceased participant, the participant was an employee or former employee of the employer for the receiving plan;</p><br /> <p style="padding-left: 40px;">(2)  the transferring plan provides for transfers;</p><br /> <p style="padding-left: 40px;">(3)  the receiving plan provides for the receipt of transfers;</p><br /> <p style="padding-left: 40px;">(4)  the participant or beneficiary whose assets are being transferred has an accumulated benefit immediately after the transfer that is at least equal to the accumulated benefit immediately before the transfer;</p><br /> <p style="padding-left: 40px;">(5)  the receiving plan imposes restrictions on distributions to the participant or beneficiary whose assets are being transferred that are no less stringent than those imposed on the transferring plan; and</p><br /> <p style="padding-left: 40px;">(6)  if a plan-to-plan transfer does not constitute a complete transfer of the participant’s or beneficiary’s interest in the 403(b) plan, the receiving plan treats the amount transferred as a continuation of a pro rata portion of the participant’s or beneficiary’s interest in the Section 403(b) plan (e.g., a pro rata portion of the participant’s or beneficiary’s interest in any after-tax employee contributions).<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> <br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> No transfers are permitted between contracts that are not part of a plan under Revenue Procedure 2007-71, because the 2007 regulations revoked Revenue Ruling 90-24 which had previously permitted such transfers.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.403(b)-10(b)(3).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Section&nbsp;403(b) plans are allowed to offer a <em>qualified Roth contribution program</em>, which is basically a Roth account for elective deferrals.<a href="#_ftn1" name="_ftnref1">¹</a> Essentially, participants of 403(b) plans establishing these programs are able to designate all or a portion of their elective deferrals as Roth contributions. Roth contributions will be included in the participant&rsquo;s gross income in the year the contribution is made and then be held in a separate account with separate recordkeeping.<a href="#_ftn2" name="_ftnref2">²</a> For details on Roth contribution programs under cash or deferred arrangements, <em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3780">3780</a>.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&sect;&nbsp;402A(b), 402A(e).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;402A(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em><em>See also</em></em> Treas. Reg. &sect;&sect;&nbsp;1.403(b)-3(c), 1.403(b)-7(e), 1.403(b)-10(d)(2).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Contributions to a 403(b) plan generally do not need to be aggregated with other 401(a) defined contribution plans of the employer in computing the Section 415 limitation. If a person participates in a 401(a) defined contribution plan and also participates in a 403(b) plan of another employer, contributions to both plans must be aggregated for 415 purposes if that participant is in control of either employer.<br /> <br /> In applying the IRC Section 415 limit to a combination of a 403(b) annuity and a defined contribution plan of an individual controlled by the employer, each plan separately must meet the limit applicable to it taking into consideration only the compensation from the employer providing the plan. In determining the combined limit, compensation from the controlled employer may be aggregated with that from the employer providing the annuity.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 415(f).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes, but time limits apply.<br /> <br /> Under the IRC, the term includable compensation ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4043">4043</a>) means compensation earned by the employee for the most recent period, ending not later than the close of the taxable year for which the limitation is being determined, that constitutes a full year of service and that precedes the taxable year by no more than five years.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A former employee is deemed to have monthly includable compensation ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4043">4043</a>) for the period through the end of the taxable year in which the employee ceases to be an employee and through the end of each of the next five taxable years. The amount of the monthly includable compensation is equal to one-twelfth of the former employee&rsquo;s includable compensation during the former employee&rsquo;s most recent year of service. Accordingly, non-elective employer contributions for a former employee must not exceed the IRC Section&nbsp;415(c) limit up to the lesser of the dollar amount in IRC Section&nbsp;415(c) or the former employee&rsquo;s annual includable compensation based on the former employee&rsquo;s average monthly compensation during his or her most recent year of service.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;403(b)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-4(d)(1).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> An employee generally can exclude from gross income the contributions paid by the employee&rsquo;s IRC Section&nbsp;501(c)(3) or public school employer to a retirement annuity for the employee&rsquo;s benefit.<a href="#_ftn1" name="_ftnref1">¹</a> The amount that the employee may exclude in the employee&rsquo;s tax year is limited.<br /> <br /> For taxable years beginning after 2001, there are two limits to be considered. The first is the overall limit ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4043">4043</a>). The second is the limit on the amount that may be excluded under a salary reduction agreement ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4047">4047</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> For taxable years beginning after 2001, the exclusion allowance is permanently repealed.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If the entire contribution in the year is by salary reduction, only the lowest of the two limits may be excluded. If the contribution is partly salary reduction and partly additional contribution, the salary reduction portion is limited to the salary reduction limit, and the excludable contribution may not exceed the IRC Section&nbsp;415 limit.<a href="#_ftn4" name="_ftnref4">⁴</a> The effect of contributions that<br /> exceed these limits is explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4046">4046</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4047">4047</a>, and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4053">4053</a>.<br /> <br /> The IRC Section&nbsp;415 overall limit (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4043">4043</a>) applies to contributions and other additions regardless of whether they are vested or not.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;403(b)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;403(b)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; &sect;&nbsp;811, PPA 2006; IRC &sect;&nbsp;403(b)(2), as repealed by EGTRRA 2001.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.415-6(e)(1).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;403(b)(1).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> To the extent a contribution in a limitation year exceeds the overall IRC Section&nbsp;415 limit, it must be included in gross income for the tax year with which or in which the limitation year ends<a href="#_ftn1" name="_ftnref1">¹</a> to the extent the excess is not returned in a timely manner.<br /> <br /> As a result of excess IRC Section 415 amounts, the annuity contract or custodial account is bifurcated into a non-qualified annuity, comprised of the excess and earnings thereon, and considered a &ldquo;403(c)&rdquo; contract and a qualifying 403(b) annuity.<a href="#_ftn2" name="_ftnref2">²</a> The entire contract fails to be a 403(b) contract if an excess annual addition is made and a separate account is not maintained with respect to the excess.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> An excess contribution made to a custodial account also may be subject to an excise tax ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4053">4053</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Treas. Reg. &sect;&sect; 1.415-6(e)(1)(ii), 1.403(b)-4(f)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. Treas. Reg. &sect; 1.403(b)-3(b)(2), referring to IRC &sect; 415(a)(2) (flush language).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. Treas. Reg. &sect; 1.403(b)-3(b)(2).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Any elective deferral in excess of the applicable limit is included in the individual&rsquo;s gross income for the year of deferral. If any such amount is included, the individual may, no later than April&nbsp;15 of the following year, allocate the excess deferrals among the plans under which the deferrals were made and, if plan language permits it, the plans may distribute to the individual the amounts so allocated together with income allocable to the amounts no later than April&nbsp;15 of that year.<a href="#_ftn1" name="_ftnref1">¹</a> A timely distribution may be made regardless of otherwise applicable prohibitions on distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4035">4035</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Because an excess deferral is not excluded from gross income, the excess amount distributed under these rules by April&nbsp;15 is not included in income as a distribution. Any income on the excess deferral is included in income in the taxable year in which distributed.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A distribution of less than the entire amount of excess and income is treated as a pro rata distribution of deferral amount and income.<a href="#_ftn4" name="_ftnref4">⁴</a> A distribution by April&nbsp;15 of excess deferrals and income is not subject to tax as a premature distribution under IRC Section&nbsp;72(t).<a href="#_ftn5" name="_ftnref5">⁵</a> A distribution of an excess deferral is not a distribution for purposes of meeting the minimum distribution requirements.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> If the excess deferral is not distributed by April&nbsp;15, it is subject to the regular prohibitions on withdrawals and is not included in the investment in the contract, or basis, even though it has been included in income. Thus, excess deferrals are includable in gross income when later distributed.<a href="#_ftn7" name="_ftnref7">⁷</a> A withdrawal that occurs before the excess deferral was made does not count as a distribution of an excess deferral.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> The amount of salary reduction excludable in a year may actually be less than the amount permitted under the limit if the overall limit is less ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4042">4042</a>). Contributions by salary reduction are not deductible employee contributions; they are employer contributions that are excludable within limits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4035">4035</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4042">4042</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;402(g)(2); Treas. Reg. &sect;&nbsp;1.402(g)-1(e)(2). <em><em>See also</em></em> Treas. Reg. &sect;&sect;&nbsp;1.403(b)-4(f)(1), 1.403(b)-4(f)(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;402(g)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.402(g)-1(e)(8).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.402(g)-1(e)(10).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.402(g)-1(e)(8).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;402(g)(2)(C); Treas. Reg. &sect;&nbsp;1.402(g)-1(e)(9).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;402(g)(6).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.402(g)-1(e)(3).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> There are several different limitations applicable to amounts contributed to 403(b) annuities. Contributions that exceed any of these particular limits may be thought of as excess contributions, but they are treated differently depending on the limit that is exceeded and, sometimes, depending on whether the excess amount is contributed to a custodial account or toward the purchase of an annuity contract.<br /> <br /> When contributions that exceed the lesser of the excludable amount or the overall limit are made to a custodial account for the purchase of regulated investment company stock or a retirement income account to the extent funded through custodial accounts, they are properly called excess contributions and are subject to an excise tax.<a href="#_ftn1" name="_ftnref1">¹</a> The tax is 6 percent (not to exceed 6 percent of the value of the account) of the following: (1) the amount by which the contributions, other than a permissible rollover contribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4007">4007</a>), exceed the lesser of the amount excludable from gross income under IRC Section&nbsp;403(b) or the overall limitation under IRC Section&nbsp;415, or whichever is applicable if only one is applicable, plus (2) any excess carried over from the preceding tax year. An excess carried over from a previous year may be reduced by contributing in a year less than the excludable amount or the contribution limit, whichever is lower. An excess also may be reduced by taxable distributions.<a href="#_ftn2" name="_ftnref2">²</a> The tax is imposed on the employee.<br /> <br /> If contributions are made toward the purchase of an annuity contract, the excess is not subject to an excise tax.<br /> <br /> For contributions in excess of the overall limit of IRC Section&nbsp;415, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4046">4046</a>.<br /> <br /> Where salary reduction contributions are in excess of the limit on elective deferrals, the amount above the limit is not excludable from income when contributed and, if not timely distributed, is included in gross income for a second time when later distributed ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4047">4047</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4042">4042</a>).<br /> <br /> Discriminatory Matching Employer Contributions. If an employer makes certain discriminatory matching contributions toward an annuity contract or to a custodial account, amounts in excess of nondiscriminatory amounts are called excess aggregate contributions and are subject to a 10 percent excise tax if not timely distributed ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3808">3808</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;4973(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;4973(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;4979.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Under the final 403(b) regulations, a non-taxable exchange or transfer is permitted for a 403(b) contract if it:<br /> <p style="padding-left: 40px;">(1)&nbsp; is a mere change of investment within the same plan, that is, a contract exchange;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; constitutes a plan-to-plan transfer, so that there is another employer plan receiving the exchange (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4058">4058</a>); or</p><br /> <p style="padding-left: 40px;">(3)&nbsp; it is a transfer to purchase permissive service credit ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4060">4060</a>).<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> Contract Exchanges within the Same Plan<br /> <br /> Under prior law, Revenue Ruling 90-24 provided that a direct transfer between issuers of an amount representing all or part of an individual&rsquo;s interest in an IRC Section&nbsp;403(b) annuity or custodial account was not a distribution subject to tax or to the premature distribution penalty provided that, after the transfer, the funds transferred continued to be subject to distribution requirements at least as strict as those applicable to them before the transfer.<a href="#_ftn2" name="_ftnref2">²</a> The final 403(b) regulations revoked Revenue Ruling 90-24 and any exchanges now are allowed under rules that generally are similar to those applicable to qualified plans.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The final regulations provide that a 403(b) contract of a participant or beneficiary may be exchanged for another 403(b) contract of that participant or beneficiary under the same 403(b) plan if each of the following conditions is satisfied:<br /> <p style="padding-left: 40px;">(1)&nbsp; the plan under which the contract is issued provides for the exchange;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; the participant or beneficiary has an accumulated benefit immediately after the exchange that is at least equal to the accumulated benefit before the exchange, taking into account the accumulated benefit under both 403(b) contracts immediately before the exchange; and</p><br /> <p style="padding-left: 40px;">(3)&nbsp; the new contract is subject to distribution restrictions with respect to the participant that are no less stringent than those imposed on the contract being exchanged and the employer enters into an information sharing agreement with the issuer of the new contract.<a href="#_ftn4" name="_ftnref4">⁴</a></p><br /> Under the information sharing agreement, the employer and the issuer agree that from time to time in the future they will provide each other with the following information:<br /> <p style="padding-left: 40px;">(1)&nbsp; information about the participant&rsquo;s employment;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; information that takes into account other 403(b) contracts or qualified employer plans, such as whether a severance from employment has occurred for purposes of the distribution restrictions and whether the hardship withdrawal rules are satisfied; and</p><br /> <p style="padding-left: 40px;">(3)&nbsp; information necessary for the resulting contract to satisfy other tax requirements, such as whether a plan loan satisfies the conditions so that the loan is not a deemed distribution under IRC Section&nbsp;72(p)(1).<a href="#_ftn5" name="_ftnref5">⁵</a></p><br /> The rule for contracts received in an exchange does not apply to a contract received in an exchange that occurred on or before September&nbsp;24, 2007, if the exchange (including the contract received in the exchange) satisfied the rules applicable at the time of the<br /> exchange.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Preamble, T.D. 9340, 72 Fed. Reg. 41128, 41131 (7-26-2007); Treas. Reg. &sect;&nbsp;1.403(b)-10(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Rev. Rul. 90-24, 1990-1 CB 97.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Preamble, T.D. 9340, 72 Fed. Reg. 41128, 41131 (July&nbsp;26, 2007).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-10(b)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-10(b)(2).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-11(g).<br /> <br /> </div></div><br />