(b)lines Ask the Experts – 415 Limit When Sponsoring Both a 401(a) and 403(b)

“We were told by our recordkeeper that it is possible to contribute up to $108,000 on behalf of an employee between both plans in 2017. Is this true?” 

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

Though technically $108,000 is the combined dollar limit on contributions to both plans, there are practical considerations that often result in this limit not coming into play for the vast majority of employees.

Normally, the limit on combined employer and employee contributions to a retirement plan is the lesser of 100% of compensation (as defined under Section 415) or $54,000. This limit is typically aggregated with other retirement plans sponsored by the same employer, so that the limit is the lesser of 100% of compensation or $54,000 across all plans.

However 403(b) plans are an exception. The 415 limit for a 403(b) plan is separate from the 415 limit for a 401(a) or 401(k) plan, unless an employee owns or controls more than 50% of a plan sponsor, in which case all plans of the owned/controlled plan sponsor are aggregated with the 403(b) for 415 limit purposes (this restriction often comes into play with respect to private practice physicians, for example). Thus, in your case, there would be a limit of the lesser than 100% of compensation and $54,000 for the 401(a) plan, with the same limit applying separately to the 403(b) plan. Thus, the combined contribution limit to both plans would be the lesser of 100% of compensation or 2 times $54,000, or $108,000.

In most plans, however, there are several limiting factors that bring the actual contribution limit well below the theoretical 415 dollar limit for most employees. First of all, if an employee earns less than $108,000 in compensation as defined under Section 415, the dollar limit is lower than $108,000—it is 100% of compensation (which is determined a little differently for the 401(a) and 403(b) plans).  For example, if my compensation is $30,000, my total contributions are limited to 100% of $30,000 or $30,000.

Secondly, employer contributions to retirement plans are rarely sufficiently large in a 401(a)/403(b) structure that, even when combined with elective deferrals, the $108,000 combined limit would be approached. And finally, even if it was desired by a plan sponsor to make employer contributions up to the 415 dollar limit, unless this was generally done for all employees at the same percentage of compensation (an expensive proposition), such contributions would be required to pass nondiscrimination testing, since the plan sponsor is a private tax-exempt entity (governmental and certain church plans being exempt from such testing). So though it is theoretically possible to have opportunities within those plan structures to provide large contributions to select employees, it can be difficult to do so as a practical matter. 

Thank you for your question!

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.