IRS Offers Review of Special 403(b) Catch-Up Contribution Rules

The IRS has published an issue snapshot discussing catch-up contributions in 403(b) plans.

403(b) plans may permit participants to make age-50 catch-up contributions, which are also allowed in 401(k) and governmental 457(b) plans, but they may also allow a special 15-year catch-up contributions for participants.

The issue snapshot explains that under the special 403(b) catch-up, employees of a qualified organization may contribute an increased dollar amount under Internal Revenue Code (IRC) Section 402(g)(1) if they’ve completed at least 15 years of service with the organization. This special 403(b) catch-up is the least of:

• $3,000;
• $15,000, reduced by the sum of:
  • amounts not included in gross income for prior taxable years by reason of this special 403(b) catch-up and
  • the aggregate amount of designated Roth contributions (per IRC Section 402A(c)) permitted for prior taxable years by reason of this special 403(b) catch-up; or
• $5,000 multiplied by the employee’s years of service with the qualified employer, less all elective deferrals the employee made in prior years to the organization’s plans. Elective deferrals include those made to a 401(k) plan, SARSEP [salary reduction simplified employee pension plan], SIMPLE [savings incentive match plan for employees] or 403(b) plan maintained by the organization.

The special 403(b) catch-up formula imposes a lifetime limit of $15,000 of elective deferrals.

The issue snapshot explains how to calculate years of service for the special 15-year catch-up contributions. It notes that a 403(b) plan that permits the special 403(b) catch-up must keep detailed records. The plan must keep participant information for the increased limit formula, including a participant’s:

• elective deferrals made to any of the organization’s plans,
• prior elective deferrals under the special 403(b) catch-up, and
• designated Roth contributions.

The plan must also keep employment records to calculate an employee’s years of service.

The calculation of the 15-year catch-up contribution can be extremely difficult. See “Tips for Correctly Calculating 15-Year Catch-Up.”

The IRS points out that if a 403(b) plan permits both the age 50 catch-up and the special 403(b) catch-up, it must consider the special 403(b) catch-up first to apply the annual limits. Then, apply the age 50 catch-up to any remaining amount, up to the IRC Section 414(v) limit. For example, the issue snapshot says, if a participant eligible for both the age 50 catch-up and $3,000 of the special 403(b) catch-up made an additional $7,000 in catch-up contributions during 2019, $3,000 of the $7,000 would be applied to the special 403(b) catch-up and the remaining $4,000 would be applied to the age 50 catch-up.

The publication of the issue snapshot comes after a program letter from IRS Tax Exempt and Government Entities Commissioner Tamera Ripperda which explained the agency’s priorities for fiscal year 2020. It says it will examine 403(b) plans for universal availability, excessive contributions and proper use of catch-up contributions under IRC Section 414(v); and examine 457(b) plans for excessive contributions and proper use of the special three-year catch-up contribution rule. According to the IRS, this strategy was delayed from fiscal year 2019 and will begin in fiscal year 2020.