403(b) Outlook: Elective Deferral Ordering Rule

September 18, 2008

403b Outlook Archive 403(b) Outlook Archive

What is the rule? The 15-Year Rule and the Age 50+ Catch-up enable eligible employees to make voluntary elective deferrals greater than the current annual 402(g) limit of $15,500.

The 15-Year Rule is available to employees with at least 15 years of service (which do not need to be consecutive) at a teaching institution, hospital, church-related organization, home health service organization, or health and welfare service agency. If an employee made elective deferrals in earlier years that were less than the 402(g) limit, he or she may be able to make deferrals of up to $3,000 in the current year. The lifetime limit is $15,000.

The Age 50+ Catch-up allows employees age 50 and older by the end of the year to make additional elective deferrals of up to $5,000 in 2008.

Ordering Rule: According to the final regulations, the amount deferred in excess of the general 402(g) limit is counted first against the 15-Year Rule $15,000 lifetime limit. Treasury Reg. 1.403(b)-4(c)(3)(iv)

Example: An employee who is age 50 has been employed by his or her eligible health and welfare service agency for 16 years. This year the employee decides to defer $20,000. The first $3,000 is counted against the employee’s lifetime limit of $15,000; $12,000 will remain for following years The employee may also contribute the additional $1,500 — for a total of $4,500 — because he or she is 50 years old.

What has changed? Prior to the regulations it was not clear in which order the rules applied. However, the regulations are consistent with the calculation procedures that TIAA had previously followed.

Effective date is Jan. 1, 2009.

What happens if an employee exceeds the 402(g) limit? Employees who exceed the maximum lifetime limit of $15,000 will be taxed twice on the deferrals if the excess amount is not refunded in a timely manner: once in the year of deferral, and then again upon distribution.

Read more about the details of the 15-year rule and the age-50 catch-up.

Next week’s issue: 75 percent joint and survivor annuity

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