(b)lines Ask the Experts – Universal Availability and Excluding Compensation

Mike Webb, Vice President, Retirement Cammack LaRhette Consulting, answers:  

Excellent question, as there is certainly some cause for confusion when reading 403(b) final regulations. 

Section 1.403(b)-5, which pertains to Universal Availability, contains the following language:   

“Further, an effective opportunity includes the right to have section 403(b) elective deferrals made on his or her behalf up to the lesser of the applicable limits in §1.403(b)-4(c) (including any permissible catch-up elective deferrals under §1.403(b)-4(c)(2) and (3)) or the applicable limits under the contract with the largest limitation  [ my emphasis ]), and applies to part-time employees as well as full-time employees.”   

Problem is, 1.403(b)-4(c) describes only the 402(g) limit, age-50 catch up, and 15-year catch-up elections, with no mention of compensation. Thus, the implication is that a participant may not be provided with an effective opportunity to defer unless he/she can defer up to the full 402(g) limit ($16,500 in 2010) regardless of any compensation limitations.   

The examples at the end of the section clarify that contributions can be limited to the 415(c) limitation (100% of “includible compensation” in the case of a 403(b) plan) with no universal availability issues, even if that amount is less than the 402(g) limit. However, note that includible compensation is generally compensation includible in gross income and thus does not exclude bonuses and commissions.   

In your question, you are referring to a definition of compensation that is less inclusive than includible compensation. Though the final regulations indicate that definitions of compensation that exclude certain categories of pay, yet satisfy 414(s)  (under which you can exclude “irregular or additional compensation” such as bonuses and commissions), continue to be acceptable definitions of compensation for determining whether contributions satisfy nondiscrimination requirements, there is no reference as to whether utilizing a 414(s) definition of compensation to determine the amount of elective deferral creates a universal availability issue or any other issue with the final 403(b) regulations.   

Thus, absence guidance to the contrary, an effective opportunity to defer under the universal availability rule appears to mean an effective opportunity to defer the lesser of 100% of 415(c) compensation, i.e., includible compensation, or the 402(g) limit, expanded for age-50 catch-up, 15-year catch-up, etc. as applicable. Restricting compensation under 414(s), at least in some circumstances, might limit that effective opportunity.   

For example, if I earned $5000 in regular salary but $20,000 in bonuses, and my employer excludes bonuses from its 414(s) definition of compensation for purposes of making salary reduction contributions, that would mean I would be unable to make an elective deferral in excess of $5000, even though I earned $25,000, and might even be over age 50. Thus, there is a concern that such compensation exclusions could operate to deny certain employees the “effective opportunity” to make elective deferrals to a 403(b) up to the 402(g) limit, and thus violate the regulation.