Here is the situation:

A new employee begins working for our company after the first of the year. When we do an MEA calculation for that employee (for that calendar year) do we need to take into account contributons made in the same calendar year to a prior employer's defined contribution plan for purposes of Section 415 compliance?

(I understand that the employee is responsible for offseting the MEA with any elective contributions made to a defined contribution plan during that calendar year.)

Nope. Section 415 limits, unlike elective contribution limits, are on a per-employer basis.

Thanks for the info Carol. That was quick!

Just call me speedy!

There is one very rare situation in which IRC Section 415©(1)(A) dollar and compensation limitations must be applied separately to the plan of each employer and jointly to the aggregated plans of both employers. This is the situation in which the employee "controls" one or both of the employers in question. The applicable rules are daunting in their complexity, but Treas. Regs. 1.415-7(h)(2)(i), 1.415-7(h)(2)(iii) and 1.415-8(d)(2) provide reasonable beginnings for a comprehensive analysis. As long as the employee in question does not control any employer, then Carol's response is entirely correct.

With respect to the parenthetical statement in the initial post, I believe that both employers share with the employee the responsibility for ensuring compliance with the 402(g) Elective Deferral Limitation, since the employers are required to withhold federal and state income tax (and liable for the amount of the tax which should have been withheld if they do not). It is prudent for employers to include in their salary reduction agreements a request for information about other employers and their plans when such employment "overlaps" with the current employment during any tax year. That seems to be "minimum required due diligence" on the part of each employer.

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NCompliance Software and Carruth Compliance Consulting

[This message has been edited by Harvey Carruth (edited 04-18-2000).]

In the 403(B) Answer Book, Q3:76 reads as follows:

How are contributions to multiple Section 403(B) employers treated under the Section 415© limit?

The answer is:

For Section 415© purposes, Section 403(B) contributions with all employers must be taken into account. Where this is done, compensation from all Section 403(B) employers is also taken into account for purposes of determining the Section 415©(1) (B) percentage limit.

Is this still correct? Did your answer refer to earnings with non-403(b)employers only? If so, how would you suggest that we discern which employees are coming from other 403(B) employers and how much was contributed on their behalf for purposes of Section 415©??

In the original question, the statement was made that although the new employer was making MEA calculations, the old employer's plan was a "defined contribution plan." Because there were no references to it being a 403(B) plan, or to the old employer doing MEA calculations, I made the assumption that the old plan was a 401(a) or 403(a) plan, not a 403(B) plan. (Note that it is not the status of the employer, but the type of plan, which is relevant.) Moreover, there are special rules if the employee makes a C election under the new employer's plan.)

The situation would indeed be different if both the old and new plans were 403(B) plans. Because 403(B) plans are treated as if they were maintained by a business controlled by the participant for 415 purposes, two 403(B) plans for the same participant would indeed have to be combined for 415 purposes.

Nevertheless, this situation does not require an extensive exchange of information between the two employers. This is because the 415© limit is equal to the lesser of 25% of compensation or $30,000. Thus, if the first plan has put no more than 25% of the compensation received from the first emplyer into the plan, and the second employer has put no more than 25% of the compensation received from the second employer into the plan, the limit will not be exceeded unless the aggregate contribution exceeds $30,000. The participant or the prior employer should be able to certify (a) whether the old plan was a 403(B) plan, and (B) what the total dollar amount of contributions to it for the current year was.

Carol has now focused our attention on situations in which an individual is employed by two employers during the same year and is eligible to participate in 403(B) plans of both employers. Whether or not the periods of employment with the two employers overlap is immaterial for the analysis of applicable IRC Sec. 415 limitations. For simplicity, I will assume that neither employer offers any other tax advantaged plans of any kind. Also, it is helpful to distinguish between the "dollar" and "compensation" components of the 415©(1) limits as follows, where GL = General Limitation, A = A Election, B = B Election, and C = C Election:

Standard 415 Dollar Limit (SDL) = $30,000 (applies to GL, A, and C)
Modified 415 Dollar Limit (MDL) = $15,000 (applies to b)

Standard 415 Compensation Limit (SCL) = 25% of 415 Compensation (applies to GL and C)
Modified 415 Compensation Limit (MCL) = 25% of 403(B) Compensation + $4,000 (applies to b)

Next, one must distinguish between "employer-specific limitations," which involve compensation and contributions associated with a single employer, and "combined-employer limitations," which involve aggregate compensation and aggregate contributions associated with both employers. For these purposes, the following abbreviations will be used:

ER1 = Employer 1
ER2 = Employer 2
CER = Combined Employers
C1 = ER1 Contribution
C2 = ER2 Contribution
CC = CER Contribution

Since Carol points out that the two plans must be combined for 415 purposes, it follows that the same "election (GL, A, B, or C)" must be made for C1 and C2. Now things get more interesting, and "analysis by election" is the most efficient approach.

General Limitation Election

415 Dollar Limitation: Compliance with the CER SDL implies compliance with both the ER1 SDL and the ER2 SDL, so it suffices to apply the CER SDL. Notice that this requires "sharing of contribution data" between ER1 and ER2. Also notice that nothing is lost by applying the ER1 SDL and the ER2 SDL, in addition to the CER SDL, even though such applications are superfluous (this is common practice in programming methodology).

415 Compensation Limitation: Compliance with the ER1 SCL and the ER2 SCL imply compliance with the CER SCL, so it suffices to apply the employer-specific SCLs. One might push the envelope by applying only the CER SCL, but doing so would allow C1 to exceed the ER1 SCL or C2 to exceed the ER2 SCL, would require "sharing of compensation and contribution data" between ER1 and ER2, and would be inadvisable in any event. It seems prudent to require compliance with employer-specific 415 limits, even if they are not technically required.

A Election

415 Dollar Limitation: See Paragraph 1 under General Limitation Election.

415 Compensation Limitation: The 415 Compensation Limitation is replaced by the "Modified 403(B) Exclusion Allowance Limitation (based on the 120-month time period ending on the date of separation)," which is not a subject for this discussion.

B Election

415 Dollar Limitation: Compliance with the CER MDL implies compliance with both the ER1 MDL and the ER2 MDL, so it suffices to apply the CER MDL. Again, this requires "sharing of contribution data" between ER1 and ER2. Yet again, nothing is lost by applying the ER1 MDL and the ER2 MDL, in addition to the CER MDL, even though such applications are superfluous.

415 Compensation Limitation: Unfortunately, compliance with the ER1 MCL and the ER2 MCL do not imply compliance with the CER MCL, so it does not suffice to apply the employer-specific MCLs. This is most easily seen by noting that there is a "doubling up" of the extra $4,000 if only employer-specific MCLs are applied. Hence, it is essential that the CER MCL be applied, which requires "sharing of compensation and contribution data" between ER1 and ER2, not only for the year in question, but for earlier years if the employee fails to be employed full time for the entire year in question at both employers. Again, it seems prudent to require compliance with employer-specific 415 limits, even if they are not required technically. In applying the CER MCL, presumably time periods representing the "last full year of service" for each employer should be determined independently and resulting compensation figures should be aggregated.

C Election

415 Dollar Limitation: See Paragraph 1 under General Limitation Election.

415 Compensation Limitation: See Paragraph 2 under General Limitation Election.

Summary:

1. The same "Election" (GL, A, B, or C) must apply to participation in both 403(B) plans.

2. A single corresponding "Combined-Employer 415 Dollar Limitation" must be applied to aggregate contributions to the two 403(B) plans.

3. With the exception of the A Election, a separate corresponding "Employer-Specific 415 Compensation Limitation" should be applied to contributions to each 403(B) plan.

4. With the exception of the A Election, an overall corresponding "Combined-Employer 415 Compensation Limitation" must be applied to aggregate contributions to the two 403(B) plans, using combined compensation from the two employers (for the last full year of service in the B Election setting).


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NCompliance Software and Carruth Compliance Consulting