As many of our readers know, employees that work for a school district, hospital, university or other non-profit organization may have access to a retirement plan called the 403(b). Similar to its cousin the 401(k), the 403(b) works very similar in that it allows employee contributions, and the employer may or may not match a percentage of those contributions.
The 403(b) is also subject to the maximum contribution rules. In other words, an employee is allowed to contribute up to $18,000 annually if they’re under age 50 and those aged 50 and older are allowed an additional $6,000 catch-up contribution. Many of these plans also allow Roth contributions for their employees.
A unique aspect of the 403(b) that readers may not be aware of is the 15-year rule for contributions. Generally, the 15-year rule allows an employee with at least 15 years of service (and their plan allows it) to make an additional contribution to their 403(b). An employee’s years of service are the total number of years worked as a full-time employee for the same employer that maintains the 403(b).
The limit on additional contributions is increased by the least of:
- $15,000, reduced by the sum of:
- The additional pre-tax elective deferrals made in prior years because of this rule, plus
- The aggregate amount of designated Roth contributions permitted for prior years because of this rule; or
- $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years.
It’s also important to understand that the 15-year catch-up can be used in addition to the age-based catch-up. For example, if an employee (age 50 or older) qualified, they could contribute the maximum salary deferral for 2016 of $18,000. Then, they could contribute the 15-year catch up of $3,000. Finally, they would be allowed the age-based catch-up of $6,000. This totals a whopping $27,000.
An important point to understand is that if an employee qualifies for both the 15-year catch-up and the aged-based catch-up, amounts over the initial $18,000 employee deferral are applied to the 15-year rule first, then to the age-based rule.
For example, if an employee contributed $23,000 to his 403(b), the $18,000 maximum employee deferral is considered first, followed by the 15-year contribution. In the case, $18,000 is considered to be contributed first, followed by $3,000 for the 15-year serviced-based catch-up. The remaining $2,000 is then applied to the age-based catch-up limit.
While the age-based catch-up is based on an annual limit, the 15-year serviced-based catch-up is subject to a use test, lifetime, and annual limit. Additionally, employee deferrals to a 403(b) are subject to the aggregation rule if an employee is also participating in a 401(k), SIMPLE, another 403(b), etc., but not a 457(b). In other words, if an employee under age 50 has access to both 403(b) and a 401(k), the maximum she can contribute in total for both plans is still $18,000, not $36,000.
If you find yourself as a participant in one of these plans, it pays to check and see what your options are regarding how much you’re able to contribute.