Some of the information necessary to perform the MEA calculation is not available to the employer unless the employee provides it (i.e., amounts previously excludable while the employee was employed by another employer). Thus, unless an employee complies with a request from the employer to provide such information, the employer cannot accurately run the MEA calculation and risks violating 403(B).

An employer is considering making a request for this type of information from its employees and telling them that if they do not provide it by a certain date, they will be prohibited from making further salary reduction contributions to the 403(B) plan until they provide the information. Can the employer do this? It doesn't seem right to me, but if this can't be done, what other steps can the employer take to get this information from the employees?

Any help would be appreciated.

The MEA calculation is employer-specific and information regarding contributions made to TSAs sponsored by other employers is not needed. (see 1.403(B)-1(d)(2))

Technically, the employer is not responsible for the MEA calculation - the employee is. It is an individual, not a plan, limit. (In fact many employees can make an election that is specific to that employee that will change the exclusion limits for that employee (as a further side note, the employee need not make a formal election of an alternate method of calculating the MEA - and as a result may not be even be aware that he or she has even made the election - the election is made simply by filling out the tax in a way that is consistent with the election)).

Again theoretically, if the employee goes over his exclusion limit, the penalty is that the excess is not "excluded" from the individual's income - the EMPLOYEEis supposed to determine the maximum and include the excess in income - also if it's a custodial account, I believe there are also penalties on excess contributions (similar to IRA rules - but I'd have to check this). You'll want to look at IRS Publication 590(??) which tells employees how to calculate the MEA (and makes it clear that the employee is the one to do it).

But you could take the position (I probably would) that it is not your (the employer's) job to monitor MEA, and you can just set up general restrictions on the limits - ex. no more than 20% of pay, or $20,000 might be a good limit and if the employee wants more he has to show that he's eligible.

If you don't put any limits on contributions, you might get some trouble from the IRS for not properly handling income tax and Social Security withholding on the excess contributions. I doubt that you'd get in trouble if you have some reasonable overall limits, but I'm not the IRS.

Is everyone confused yet; certainly your regular nonprofit employee doesn't stand a chance of properly calculating the MEA, which has to be the most ridiculous limit/rule there is. (Actually it gets even more ridiculous the more you have to work with it!)

Long-winded as usual (I am).

Thought of a couple of other comments.

Am in agreement with an earlier message that the MEA info is employer-specific, but am sympathetic to your situation. The problem in my experience with calculating the MEA for employees is that it is incredibly complex, you don't know what elections they have made, and you have to keep the employee's data indefinitely - I worked with an employer that did the calculations that kept data for its oldest employees back to the 1930s - rehires, miscalculations in earlier years, data forever - it's a quagmire.

Also, I agree that it doesn't seem a good idea to keep people out of the plan because you can't calculate their MEA - you could get sued for that - plus you've got the discrimination rules under 403(B) and discrimination is the sort of thing that could disqualify the plan.

With the IRS' recent statements that it has intensified its focus on 403(B) plans and that the most common operational defect it encounters in plan examinations is contributions in excess of the MEA, it appears that it really is the employer's problem to make sure that the MEA is not exceeded.

Even though it may technically be the employee's responsibility to keep contributions within the MEA, the employer would be liable for failure to withhold income tax on excess contributions, and it appears from messages under other topics on this board that the IRS prefers to go after the employer, rather than the employee, to correct a 403(B) plan's failure to correctly apply the MEA.

I have not had a lot of experience with 403(B) plans, but it appears to me that an employer must take some steps to ensure that the MEA is not exceeded or else, when the IRS identifies this problem in a plan examination, the employer will be the one who is really holding the bag.

I guess the question in a nutshell is this: How much responsibility must the employer take in ensuring compliance with the MEA and, to the extent that the employer must rely on cooperation from the employee in calculating the MEA, how can the employer best obtain such cooperation?

Again, thank you.

I would agree with you, Scott, that it is the employer's responsibility to make at least some attempt to ensure that the MEA calculations are correct. In its recent audits of 403(B) plans, the IRS has typically imposed liability on employers for withholding taxes in the case of 403(B) plan defects or overexclusion, rather than go after the employees.

The question then becomes how hard the employer has to work to ensure the information it gets is accurate. Most employers are not in a position to double-check every statement the employee makes, even though typically information from other employers is not necessary to perform the MEA calculations. However, some information (such as what elections an employee has made in past years) is available only to the employee.

Our firm has typically recommended a two-part approach to this. First, the employer requires the employee, as a condition of participation, to supply all information necessary to make the calculations, and to certify that it is true. Second, the employer permits a carrier to sell contracts only if it certifies both that the contract it sells is a 403(B) contract and that the amount to be contributed to it is within IRS limits. Depending on the size and administrative facilities of the employer, it may want to check MEA calculations, or at least a random sampling of them.

However, the problem is not as intractable as it may at first appear. Most employees who have more than a few years of service have limits under 415© and/or 402(g) which are smaller than the MEA limit in any event. And of course, the 415© and 402(g) limits are typically much easier to calculate than the MEA limit.

Moreover, although theoretically the IRS could impose withholding taxes on the employer even in the case of an innocent error, IRS representatives have stated informally that they would not do that if the employer had taken reasonable precautions to guard against overexclusion, and made a mistake based on an employee error.
------------------
Employee benefits legal resource site

I agree with everyone, but to a degree.

I think you have to have find a balance between the employer's and employee's obligations. I think - personally - that for the employer to take on the burden of determining individual MEA limits is too much expense and too much of a responsibility on the employer - perhaps if you had a small group of employees it wouldn't be too bad, but to do the MEA calculations for 100s or thousands of employees is too much, especially since as Ms. Calhoun points out the MEA limits are fairly hard to exceed if you set up the proper annual limits. I would think that effort would be a waste.

So far as the audit risk, I think the employer has some responsibility to set limits on how much employees get each year - 20% (maybe 15% if you had a defined benefit plan that you didn't want to value) of gross pay a year is a lot for most people. My guess is that the MEA problems that have drawn the IRS attention have been egregious situations, where the employer had placed no limits on amounts put aside, or the limits were ridiculous.

I still don't like the idea of keeping a participant out of a TSA because they don't give the employer service and compensation data. 1. the employer originally had the data anyway. 2. what employee keeps track of hours and status (part-time vs. full time)? Remember that the MEA is based on years of service, that you don't get a full year if you're part-time, and that the definition of full v. part-time varies by industry practice 3. nondiscrimination issues 4. bad employee relations 5. why have a plan if you don't let people participate?

Why not have the employer create and distribute a worksheet for the employees to figure out their own limit. The employer then is serving the educational role (which I think it should do for its own and its employee's benefits), but the responsibility for the calculation remains with the employee.

As a financial planner working with employees participating in 403(B) plans, I have also had my share of problems gathering info to help determine the MEA. Employers won't release this to me and the employees don't usually keep good historical records. The trend by some of the larger employers is to have the financial advisor sign a worksheet certifying that the employee is within IRS limits. Their explantion for this is that they don't have the time/personel/ability to determine or monitor the MEA. Their thinking is that they can pass on the liability to the financial advisor. While I don't mind helping the client determine their limit, I wonder if the employer is truly relieving themself of all liability and to what extent am I assuming that liability?