This is not a silly question.
It is common knowledge that there are annual limits to the amount that companies and their employees may contribute to defined contribution plans (“DC plans”), such as 403(b)s. The amounts are adjusted for the cost-of-living and are published annually; in 2021, the limit was $58,000.
But it may come as a surprise that for 403(b) plans, the contributions counted toward the annual limit must also include an employee’s account under an outside employer’s DC plan, if the individual has more than a 50% ownership interest in that other employer.
Outside ownership happens, especially within the employee populations of nonprofits such as hospitals and universities. In a recent Issue Snapshot published by the IRS on www.irs.gov., the agency stresses the importance of gathering data on employees participating in outside defined contribution plans, noting:
“This issue is frequently found during examinations of 403(b) plans maintained by governmental and tax-exempt healthcare entities and colleges/universities. This is because many of the healthcare doctors and the university professors maintain a practice outside of the entity that is the general 403(b) plan sponsor.”
Get Ahead of the Problem – Best Practices
In this situation, consistent employee communication is key; and, as with most aspects of plan compliance, documentation is as important as actions. If your 403(b) plan were audited, the IRS would scrutinize your entity’s internal controls, including:
- Your policies and procedures regarding outside employment. If you permit your employees to work for another unrelated entity, your procedures should include:
- Notifying all employees of the IRS rule about the annual contribution limit
- Requiring employees to inform you of their ownership in any unrelated employer
- Requiring the affected employees (50%-and-greater outside owners) to (i) confirm whether or not they participate in a DC plan with that outside entity, and (ii) give you regular updates throughout the plan year on amounts contributed to their account in that plan.
- Annual notices and mid-year updates. You should be able to show the IRS that you provide the required notice to employees about the contribution limits at least annually. It makes sense from a practical point of view to request updates from any affected employees at least once or twice during the plan year, so that you can anticipate their total aggregated DC contributions for the year and adjust contributions to your plan, as needed, to stay below the annual limit.
- 415 Testing Compliance. Do the testing with all of the data – if any employee is a 50% or greater owner of an outside entity and does participate in a DC plan with that entity, be sure to include those outside defined contribution plan contributions with the contributions allocated to the participant’s 403(b) account to determine whether the IRS annual contribution limit has been exceeded.
- Make any necessary corrective distributions timely. The IRS requires that a corrective distribution of any excess contributions, and attributable earnings, be made to the affected participant first from the 403(b) plan by the end of the year in which the excess occurred.