(b)lines Ask the Experts – Turning Salary Into Employer Contributions When Limits Are Met

“Instead of her current salary of $150,000, she proposed that we pay her $140K and that we make a $10K employer contribution to the 403(b). We are a public higher education organization, so there are no nondiscrimination issues, and the employee would still be within her 415 limit on total contributions to the plan as well. Can we do this? And, if so, do we need to offer this option to other employees as well?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

While this is quite a novel suggestion on the part of this employee to contribute additional funds to her 403(b) plan, unfortunately for her, this generally cannot be done. The reason is that employer contributions to a 403(b) plan that are considered to be “individually negotiated,” are considered to be elective deferrals that are subject to the 402(g) limit, and NOT an employer contribution. What does “individually negotiated” mean? Well, it is a “facts and circumstances” issue, but it would likely include the situation you describe, where an employee attempts to negotiate with his/her employer to get around the 402(g) limit by having you make an employer contribution to the plan. Thus, the employee generally could not take this action to turn salary into employer contributions.

You stated that the employee in question has maxed out to both your 403(b) and 457(b) plans, but you did not state whether or not she is eligible for special elections such as the age-50 catch-up, which allow her to defer additional amounts to both the 403(b) and 457(b) plan (since you are a public employer, age-50 catch-up contributions to both plans would be permitted if provided for in each of the plans), so that may be an option for her. And finally, if you offer a health savings account (HSA) for which this employee is eligible, she could defer amounts to that program as well (if she is not already doing so) that could be used for retirement purposes, both for certain medical expenses in retirement and for other expenses if she is over 65 years of age (without penalty, but subject to ordinary income taxation on distribution).

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.