403(b) Outlook: Deadline for Refunding Excess Aggregate Contributions

February 04, 2008

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Retirement plans are subject to a variety of limits on the amounts of employer and employee contributions that can be made in a given year. One limit applies only to voluntary contributory retirement plans subject to the "Matching Test" under Section 401(m) of the Internal Revenue Code. Certain church plans are exempt and so are plans sponsored by public institutions.

The Matching Test is designed to determine whether employer matching contributions and employee after-tax contributions to the accounts of HCEs are disproportionately high in comparison to this type of contributions to the accounts of non-highly compensated employees (NHCEs). For plan years beginning in 2007, the highly compensated employee limit is $100,000 and the includible compensation amount is $225,000.

If a plan fails the Matching Test, contributions to the accounts of HCEs over the amount that could have been contributed without causing the plan to fail are called excess aggregate contributions.

Refunds or Additional Contributions
When the Matching Test shows that excess aggregate contributions have been made for HCEs, they must be eliminated before the end of the next plan year to avoid possible disqualification of the entire plan. One of the ways to correct the failure is to refund the excess to the HCEs. And, if the employer wants to avoid an excise tax, the refunds must be made within 2 1/2 months after the end of the plan year, i.e., by March 15, 2008 for 2007 calendar-year plans. Another method to correct a plan that fails the Matching Test is to make Qualified Nonelective Contributions (QNCs) for NHCEs before the end of the next plan year, but QNCs generally cannot be used if the Matching Test was conducted using prior year data for NHCEs.

Instructional booklet and testing software
For detailed instructions for performing the matching test, click on the link above to download a copy of "Important Information for Contributory 403(b) Retirement Plans for 2007." You can download a free copy of version 3.0 of TIAA-CREF’s Matching Test System software from our download center. If you need assistance in downloading the software, call the TIAA-CREF Administrator Telephone Center at 888 842-7782.


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