Help Needed: Multiple Employers and the 415(c) Limit

I have a tax-related question that I’ve been having trouble getting answered, so I thought I’d throw it out here in hopes that someone can provide any insight… Besides, I’ve searched high and low and haven’t been able to find an answer online, so if we can get this sorted out here, it’ll be available for others to stumble across. This question actually first came up in the comments to my article on how to prioritize your retirement contributions and I’ve been struggling with it ever since.

In short, I’ve been planning on making my required contributions to my employer’s defined contribution plan, maxing out both my optional 403(b) and 457(b), and also contributing to a SEP-IRA based on self-employment income. In response to this, a commenter named CPA1298 asked whether or not I’ll bump up against the $44, 000 maximum annual retirement plan contribution limit. As I understand it, the limit that he’s asking about applies to “elective deferrals” in the form of both employer and employee contributions, and is defined in section 415(c) of the Internal Revenue Code (IRC), although it’s actually $45, 000 (or 100% of pay, whichever is less) for 2007.

Anyway, I didn’t have a good answer to his question, so I started researching it…

For starters, let’s talk about a bit more about my retirement options:

1. My employer’s defined contribution plan. I had two retirement savings options when I started work — a defined benefit plan (a traditional pension) or a defined contribution plan (I chose the latter). In either case, I would be compelled to contribute 5% of my income to the plan of my choice, and my employer also makes additional contributions. This was a one-time, irrevocable decision that had to be made during my first 60 days on the job.

So how does the 415(c) limit apply to this plan?

As I noted above, my understanding is that this limit deals with elective deferrals (but I may be wrong). Since these contributions are compulsory, and made pursuant to a one-time, irrevocable decision, it seems to me that they should not count toward the limit (but I could, of course, be wrong).

2. My optional 403(b) plan. This account is a tax-deferred account much like a 401(k). I am free to contribute up to $15, 500 in pre-tax funds in 2007. There is no employer match.

3. My optional 457(b) plan. This is likewise a tax-deferred retirement savings account. Again, I am free to contribute up to $15, 500 in pre-tax funds to it in 2007, and I have confirmed that I can participate in both the 403(b) and the 457(b) up to the full amount (i.e., they don’t share a $15, 500 limit, so I can defer taxes on up to $31, 000 between them). Here again, there is no employer match.

So those are the options that I have at my disposal through my employer. As I’ve noted previously, however, I also have a decent amount of self-employment income from a sole proprietorship totally unrelated to my day job. Thi brings us to…

(4) My SEP-IRA. I can contribute 20% of my net self-employment income (less 1/2 of my self-employment taxes) to this account. Here again, it’s a tax deferred contribution.

As you can see, depending on how things work, I may or may not run into trouble with the 415(c) limit of $45, 000. So that brings me to my main questions…

The most important thing for me right now is determining whether or not the 415(c) limit is applied on a per employer basis. If it is, then it seems that I should have two such limits — one for my day job and one for my self-employment. I have read articles suggesting that this is true (including one from TIAA-CREF, but nothing from the IRS themselves), and the IRC guidance also supports this notion, as they say in section 415(f) that plans of related employers must be aggregated when applying that section’s contribution limitations. The implication here seems to be that plans from different employers should not be aggregated.

The other issue relates to my job-related retirement plans… Am I correct in assuming that the defined contribution plan doesn’t count toward the limit since it’s not elective (or at least it doesn’t appear to be based on my understanding of the term ‘elective’)? If not, then I’m in the clear (assuming the SEP-IRA is subject to it’s own 415(c) limit). If so, then what about the 457(b)? The treatment of this sort of plan seems to be different, and I’ve seen claims that 457(b) plans don’t enter into other plan calculations.

Please not that I’m looking for a concrete answer, so if you disagree with me, please do your best to support your view with information from the IRS. Likewise, if you think I’m right, it would be great if you could point out why.

And before anyone suggests that I seek professional counsel, please note that I’ve already contacted our tax attorney about this. I have, however, yet to receive a clear answer on any of it.

12 Responses to “Help Needed: Multiple Employers and the 415(c) Limit”

  1. Anonymous

    Retirement Contribution Limits Tax Year 2007
    Elective salary deferral / annual contribution limits:
    Solo 401(k), Roth 401(k), 403(b), and federal Thrift Savings Plan $15,500
    Solo-401(k), 403(b), and SEP IRA plans total annual employer + employee contribution limit – (Section 415 limit): $45,000
    The 457 plan limits are not counted against the $45,000.
    The term elective deferrals includes amount contributed to 401K, 403(b),SEP’s, Simple,Code Section 402(g)(3). Also 25% in income Max Contribution to SEP.

  2. Nickel

    John: Thanks for your thoughts. Here’s the thing… My defined contribution plan isn’t elective, so it’s not subject to the 402(g) limitation. Moreover, as you point out, the 457(b) doesn’t count. Thus, my 403(b) covers the $15.5k allowed in this section. Recall, however, that this section refers to *employee* contributions. SEP contributions are coded as *employer* contributions and so aren’t subject to the 402(g) limits. Rather, they are dealt with in section 415, which lays out the employer + employee total deferral.

    For what it’s worth, I’m now quite convinced that Tom Geer nailed it in comment #6.

  3. Anonymous

    For what it’s worth, I think you may be looking at the wrong section, for at least part of the issue. 402(g) limits the total elective deferrals that an individual can have under 401, 408 and 403 to $15,500 per year. It specifically excludes 457, so I agree that is separate. Since some contributions to your SEP are “employer” contributions, my conclusion is that you have $15,500 for all 401k, 403b and SEP plans for ELECTIVE DEFERRALS (inclusive of employer contributions, the limit would be $45,000) and then another $15,500 for 457b plans.

  4. Anonymous

    This is a fantasic question, and one I had never run into before. I find it very practical because I have a government run hospital as a client where we have installed both a 403(b) and a 457(b). I am not going to re-hash some of the great comments already provided, but I will add that my research confirms that it is generally accepted that the 415 limit is per employer, although I have seen some conflicting writings.

    As is usual when dealing with Uncle Sam, there is no clear right or wrong… just generally accepted. Of course, with our income tax system it is all correct until you get audited. My advise, pay a CPA to do your taxes so they sign your tax return too!

    Art Dinkin, CFP

  5. Anonymous

    Here’s the deal, assuming no catch-up contributions and no special rules under the deferral limits or the aggregate limit. Catch-ups tend to interact more than base levels and are usually an increase in the aggregate limitations.

    1-457 is more or less off on its own, so the $15,500 into that is fine.

    2-The deferral limits for qualified plans and 403(b) are per employer AND per employee. You get one bite out of that apple per year, another $15,500.

    3-The aggregate limits are per employer, which sounds like a good thing. But there is a special rule that says your 403(b)’s employer is any business of which you have more than 50% control (415(k)(4)). That provision also clearly lumps your SEP-IRA with the 403(b). So you only get one aggregate limitation because both plans are deemed maintained by the same employer. Theoretically, different compensation definitions could vary the results around the margins, but only where the limitation is the percentage and not the dollar amount. The aggregate limit limits deferrals, as well.

    4-If there really was a one-time irrevocable election, those amounts are treated as employer contributions for all purposes.

    5-I get to a total of $45,000 (403(b) AND SEP all in) plus $15,500 (457).

  6. Nickel

    Wayne, according to 415(g):

    415(g) Aggregation of plans
    Except as provided in subsection (f)(3), the Secretary, in applying the provisions of this section to benefits or contributions under more than one plan maintained by the same employer, and to any trusts, contracts, accounts, or bonds referred to in subsection (a)(2), with respect to which the participant has the control required under section 414(b) or (c), as modified by subsection (h), shall, under regulations prescribed by the Secretary, disqualify one or more trusts, plans, contracts, accounts, or bonds, or any combination thereof until such benefits or contributions do not exceed the limitations contained in this section. In addition to taking into account such other factors as may be necessary to carry out the purposes of subsection (f), the regulations prescribed under this paragraph shall provide that no plan which has been terminated shall be disqualified until all other trusts, plans, contracts, accounts, or bonds have been disqualified.

    It seems fairly clear from the emphasized portion that contributions are aggregated on a per employer basis when determining whether or not contributions exceed the limits outline in that section (i.e., Section 415).

    As for the reference to subsection (f)(3), that applies to “multiemployer” plans, which I don’t have (this is different from multiple plans from different employers).

  7. Anonymous

    I’m writing to disagree.
    Section 415c: Annual additions to a defined contribution plan are defined as the sum for a limitation year of all of the following:

    l employer contributions;

    l a specified portion of employee contributions, taken into account without regard to any rollover contributions or employee contributions to a supplemental executive plan that are excludable from gross income under a salary or deferred arrangement; and

    l forfeitures.13

    Per 26(reference item) Reg. §1.415-1(c)-1(b)(6)(ii)(C), as added by T.D. 9319 (April 4, 2007).

    27 (reference item)Reg. §1.415-1(c)-1(b)(6)(ii)(D), as added by T.D. 9319 (April 4, 2007).

    Amounts contributed to a simplified employee pension are treated as allocated to the individual’s account as of the last day of the limitation year ending with or within the taxable year for which the contribution is made. (see 26 reference item above) If, in a particular limitation year, an employer contributes an amount to an employee’s account with respect to a prior limitation year and such contribution is required by reason of such employee’s rights resulting from qualified military service, such contribution is not considered an annual addition with respect to the employee for that particular limitation year in which the contribution is made, but is considered an annual addition for the limitation year to which the contribution relates.( see 27 reference item above)

    Notice that the SEP is included as an annual addition. And the annual additions are made up of employee contributions and/plus employer contributions. Therefore you are contributing $31k as an ee and your contibution as an employer to your SEP means you can only put $14 into the SEP to not go over the $45k limit for 2007.

    Good question. I think your argument about the annual addition is “per – employer” is an incorrect reading of the code.

    excerpt from ref 26 above follows:

    Section 415 was added to the Code by the Employee Retirement Income Security Act of 1974 (88 Stat. 829), Public Law 93-406 (ERISA), and has been amended many times since. Section 415 provides a series of limits on benefits under qualified defined benefit plans and on contributions and other additions under qualified defined contribution plans. See also section 401(a)(16). Pursuant to section 415(a)(2), the limitations of section 415 also apply to section 403(b) annuity contracts and to simplified employee pensions described in section 408(k) (SEPs). In addition, the limitations of section 415 for defined contribution plans apply to contributions allocated to any individual medical account that is part of a pension or annuity plan established pursuant to section 401(h) and to amounts attributable to medical benefits allocated to an account under a welfare benefit fund established for a key employee pursuant to section 419A(d)(1).

    My two cents – no matter how many employers or plans available to you – your limited to $45k for 2007.

  8. Anonymous

    I agree that TIAA-CREF’s article implies that you can have what amounts to multiple 415 limits, but I wouldn’t assume that theirs is the definitive answer.

    In my experience, in general, the IRS chooses the most conservative/restrictive limitation. So I would similarly assume that (although compulsory) the 5% mandated contribution is considered elective (regardless of the dictionary-definition of ‘elective’).

    I’ll try to hit this afternoon…

  9. Nickel

    I mentioned above an article from TIAA-CREF. Here is the pertinent passage:

    Exceeding the 415 Limit
    IRC section 415 specifies the maximum contribution — employee plus employer as well as before-tax and after-tax — that can be made to a retirement plan in a calendar year currently is $45,000 or 100 percent of taxable compensation, whichever is less. Like the 402(g) limit, the $45,000 amount is indexed to the cost of living.

    You may have some clients who are contributing more than the maximum allowable under section 415, especially if their employer operates both a qualified basic retirement plan for employer contributions and a 403(b) supplemental plan for employee contributions. When someone participates in both a 401(k) plan and a 403(b) plan, for example, contributions to each plan are generally not added together to calculate an employee’s 415 limit*. An employee can seemingly exceed the 415 limit because it is applied on a per-employer basis. This is true regardless of the number of plans an employee participates in during the year or how many plans an employer operates. (Source) (Bold emphasis added by me)

    While it’s primarily written in the context of 403(b) contributions, it seems more or less parallel to my situation. Like I said, this makes it sound pretty clear, but TIAA-CREF isn’t the one in charge of officially interpreting the IRC.

  10. Anonymous

    I hope we can get a final solution to this, as it may begin affecting me in the next couple years.

    I can’t believe this issue is so difficult to nail down; I’ve looked and looked and can’t find a straight answer.

    The best source I contacted was a senior partner at my firm, who indicated that your limits were as you mentioned; $15,500 for 403b and 457, as well as $45,000 for the SEP, for a whopping total of $76,000.

    However, that still seems to good to be true, and I’m inclined to think that the $44,000 limit is a per-employee limit for the sum total of elective deferrals and employer contributions (which are what the SEP-IRA consists of).

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