Reg. § 1.403(b)-4 Contribution limitations.
(a) Treatment of contributions in excess of limitations The exclusion provided under applies to a participant only if the amounts contributed by the employer for the purchase of an annuity contract for the participant do not exceed the applicable limit under sections and , as described in this section. Under , a section contract is required to include the limits on elective deferrals imposed by section , as described in of this section. See of this section for special rules concerning excess contributions and deferrals. Rollover contributions made to a section contract, as described in , are not taken into account for purposes of the limits imposed by section , , section , , and this section, but after-tax employee contributions are taken into account under section , , and of this section.
(b) Maximum annual contribution
(1) General rule In accordance with section and , the contributions for any participant under a section contract (namely, employer nonelective contributions (including matching contributions), section elective deferrals, and after-tax employee contributions) are not permitted to exceed the limitations imposed by section . Under section , contributions are permitted to be made for participants in a defined contribution plan, subject to the limitations set forth therein (which are generally the lesser of a dollar limit for a year or the participant's compensation for the year). For purposes of section , contributions made for a participant are aggregated to the extent applicable under sections , (c), (m), (n), and (o). For purposes of section , through , this section, and through , a contribution means any annual addition, as defined in section .
(2) Special rules See section for a special rule under which contributions to section contracts are generally aggregated with contributions under other arrangements in applying section . For purposes of applying section (relating to compensation) with respect to a section contract, except as provided in section , a participant's includible compensation (as defined in ) is substituted for the participant's compensation, as described in section . Any age 50 catch-up contributions under of this section are disregarded in applying section .
(c) Section 403(b) elective deferrals
(1) Basic limit under section 402(g)(1) In accordance with section , the section elective deferrals for any individual are included in the individual's gross income to the extent the amount of such deferrals, plus all other elective deferrals for the individual, for the taxable year exceeds the applicable dollar amount under section . The applicable annual dollar amount under section is $15,000, adjusted for cost-of-living after 2006 in the manner described in section . See for a universal availability rule that applies if any employee is permitted to have any section elective deferrals made on his or her behalf.
(2) Age 50 catch-up
(i) In general In accordance with section and the regulations thereunder, a section contract may provide for catch-up contributions for a participant who is age 50 by the end of the year, provided that such age 50 catch-up contributions do not exceed the catch-up limit under section for the taxable year. The maximum amount of additional age 50 catch-up contributions for a taxable year under section is $5,000, adjusted for cost-of-living after 2006 in the manner described in section . For additional requirements, see regulations under section .
(ii) Coordination with special section 403(b) catch-up In accordance with sections and , the age 50 catch-up described in this may apply for any taxable year in which a participant also qualifies for the special section catch-up under of this section.
(3) Special section 403(b) catch-up for certain organizations
(i) Amount of the special section 403(b) catch-up In the case of a qualified employee of a qualified organization for whom the basic section elective deferrals for any year are not less than the applicable dollar amount under section , the section elective deferral limitation of section for the taxable year of the qualified employee is increased by the least of—
(A) $3,000;
(B) The excess of—
(1) $15,000, over
(2) The total elective deferrals described in section made for the qualified employee by the qualified organization for prior years; or
(C) The excess of—
(1) $5,000 multiplied by the number of years of service of the employee with the qualified organization, over
(2) The total elective deferrals (as defined at ) made for the employee by the qualified organization for prior years.
(ii) Qualified organization.
(A) For purposes of this , qualified organization means an eligible employer that is—
(1) An educational organization described in section ;
(2) A hospital;
(3) A health and welfare service agency (including a home health service agency);
(4) A church-related organization; or
(5) Any organization described in section .
(B) All entities that are in a church-related organization or an organization controlled by a church-related organization under section are treated as a single qualified organization (so that years of service and any special section catch-up elective deferrals previously made for a qualified employee for a church or other entity within a church-related organization or an organization controlled by the church-related organization are taken into account for purposes of applying this to the employee with respect to any other entity within the same church-related organization or organization controlled by a church-related organization).
(C) For purposes of this , a health and welfare service agency means—
(1) An organization whose primary activity is to provide services that constitute medical care as defined in section (such as a hospice);
(2) A section organization whose primary activity is the prevention of cruelty to individuals or animals;
(3) An adoption agency; or
(4) An agency that provides substantial personal services to the needy as part of its primary activity (such as a section organization that either provides meals to needy individuals, is a home health service agency, provides services to help individuals who have substance abuse, or provides help to the disabled).
(iii) Qualified employee For purposes of this , qualified employee means an employee who has completed at least 15 years of service (as defined under of this section) taking into account only employment with the qualified organization. Thus, an employee who has not completed at least 15 years of service (as defined under of this section) taking into account only employment with the qualified organization is not a qualified employee.
(iv) Coordination with age 50 catch-up In accordance with sections and , any catch-up amount contributed by an employee who is eligible for both an age 50 catch-up and a special section catch-up is treated first as an amount contributed as a special section catch-up to the extent a special section catch-up is permitted, and then as an amount contributed as an age 50 catch-up (to the extent the catch-up amount exceeds the maximum special section catch-up after taking into account sections and , this , and any limitations on the special section catch-up that are imposed by the terms of the plan).
(4) Coordination with designated Roth contributions See regulations under section for rules for determining whether an elective deferral is a pre-tax elective deferral or a designated Roth contribution.
(5) Examples The provisions of this are illustrated by the following examples:
Example 1.
(i) Facts illustrating application of the basic dollar limit. Participant B, who is 45, is eligible to participate in a State university section plan in 2006. B is not a qualified employee, as defined in of this section. The plan permits section elective deferrals, but no other employer contributions are made under the plan. The plan provides limitations on section elective deferrals up to the maximum permitted under and of this section and the additional age 50 catch-up amount described in of this section. For 2006, B will receive includible compensation of $42,000 from the eligible employer. B desires to elect to have the maximum section elective deferral possible contributed in 2006. For 2006, the basic dollar limit for section elective deferrals under of this section is $15,000 and the additional dollar amount permitted under the age 50 catch-up is $5,000.
(ii) Conclusion. B is not eligible for the age 50 catch-up in 2006 because B is 45 in 2006. B is also not eligible for the special section catch-up under of this section because B is not a qualified employee. Accordingly, the maximum section elective deferral that B may elect for 2006 is $15,000.
Example 2.
(i) Facts illustrating application of the includible compensation limitation. The facts are the same as in Example 1, except B's includible compensation is $14,000.
(ii) Conclusion. Under section , contributions may not exceed 100 percent of includible compensation. Accordingly, the maximum section elective deferral that B may elect for 2006 is $14,000.
Example 3.
(i) Facts illustrating application of the age 50 catch-up. Participant C, who is 55, is eligible to participate in a State university section plan in 2006. The plan permits section elective deferrals, but no other employer contributions are made under the plan. The plan provides limitations on section elective deferrals up to the maximum permitted under and of this section and the additional age 50 catch-up amount described in of this section. For 2006, C will receive includible compensation of $48,000 from the eligible employer. C desires to elect to have the maximum section elective deferral possible contributed in 2006. For 2006, the basic dollar limit for section elective deferrals under of this section is $15,000 and the additional dollar amount permitted under the age 50 catch-up is $5,000. C does not have 15 years of service and thus is not a qualified employee, as defined in of this section.
(ii) Conclusion. C is eligible for the age 50 catch-up in 2006 because C is 55 in 2006. C is not eligible for the special section catch-up under of this section because C is not a qualified employee (as defined in of this section). Accordingly, the maximum section elective deferral that C may elect for 2006 is $20,000 ($15,000 plus $5,000).
Example 4.
(i) Facts illustrating application of both the age 50 and the special section catch-up. The facts are the same as in Example 3, except that C is a qualified employee for purposes of the special section catch-up provisions in of this section. For 2006, the maximum additional section elective deferral for which C qualifies under the special section catch-up under of this section is $3,000.
(ii) Conclusion. The maximum section elective deferrals that C may elect for 2006 is $23,000. This is the sum of the basic limit on section elective deferrals under of this section equal to $15,000, plus the $3,000 additional special section catch-up amount for which C qualifies under of this section, plus the additional age 50 catch-up amount of $5,000.
Example 5.
(i) Facts illustrating calculation of years of service with a predecessor organization for purposes of the special section catch-up. Participant A is an employee of hospital H and is eligible to participate in a section plan of H in 2006. A does not have 15 years of service with H, but A has previously made special section catch-up deferrals to a section plan maintained by hospital P which has since been acquired by H.
(ii) Conclusion. The special section catch-up amount for which A qualifies under of this section must be calculated taking into account A's prior years of service and section elective deferrals with the predecessor hospital if and only if A did not have any severance from service in connection with the acquisition.
Example 6.
(i) Facts illustrating application of the age 50 catch-up and the section dollar limitation. The facts are the same as in Example 4, except that the employer makes a nonelective contribution for each employee equal to 20 percent of C's compensation (which is $48,000). Thus, the employer makes a nonelective contribution for C for 2006 equal to $9,600. The plan provides that a participant is not permitted to make section elective deferrals to the extent the section elective deferrals would result in contributions in excess of the maximum permitted under section and provides that contributions are reduced in the following order: the special section catch-up elective deferrals under of this section are reduced first; the age 50 catch-up elective deferrals under of this section are reduced second; and then the basic section elective deferrals under of this section are reduced. For 2006, the applicable dollar limit under section is $44,000.
(ii) Conclusion. The maximum section elective deferral that C may elect for 2006 is $23,000. This is the sum of the basic limit on section elective deferrals under of this section equal to $15,000, plus the $3,000 additional special section catch-up amount for which C qualifies under of this section, plus the additional age 50 catch-up amount of $5,000. The limit in of this section would not be exceeded because the sum of the $9,600 nonelective contribution and the $23,000 section elective deferrals does not exceed the lesser of $49,000 (which is the sum of $44,000 plus the $5,000 additional age 50 catch-up amount) or $53,000 (which is the sum of C's includible compensation for 2006 ($48,000) plus the $5,000 additional age 50 catch-up amount).
Example 7.
(i) Facts further illustrating application of the age 50 catch-up and the section dollar limitation. The facts are the same as in Example 6, except that C's includible compensation for 2006 is $58,000 and the plan provides for a nonelective contribution equal to 50 percent of includible compensation, so that the employer nonelective contribution for C for 2006 is $29,000 (50 percent of $58,000).
(ii) Conclusion. The maximum section elective deferral that C may elect for 2006 is $20,000. A section elective deferral in excess of this amount would exceed the sum of the limit in section plus the additional age 50 catch-up amount, because the sum of the employer's nonelective contribution of $29,000 plus a section elective deferral in excess of $20,000 would exceed $49,000 (the sum of the $44,000 limit in section plus the $5,000 additional age 50 catch-up amount). (Note that a section elective deferral in excess of $20,000 would also exceed the limitations of section unless a special section catch-up were permitted.)
Example 8.
(i) Facts further illustrating application of the age 50 catch-up and the section dollar limitation. The facts are the same as in Example 7, except that the plan provides for a nonelective contribution for C equal to $44,000 (which is the limit in section ).
(ii) Conclusion. The maximum section elective deferral that C may elect for 2006 is $5,000. A section elective deferral in excess of this amount would exceed the sum of the limit in section plus the additional age 50 catch-up amount ($5,000), because the sum of the employer's nonelective contribution of $44,000 plus a section elective deferral in excess of $5,000 would exceed $49,000 (the sum of the $44,000 limit in section plus the $5,000 additional age 50 catch-up amount).
Example 9.
(i) Facts illustrating application of the age 50 catch-up and the section includible compensation limitation. The facts are the same as in Example 7, except that C's includible compensation for 2006 is $28,000, so that the employer nonelective contribution for C for 2006 is $14,000 (50 percent of $28,000).
(ii) Conclusion. The maximum section elective deferral that C may elect for 2006 is $19,000. A section elective deferral in excess of this amount would exceed the sum of the limit in section plus the additional age 50 catch-up amount, because C's includible compensation is $28,000 and the sum of the employer's nonelective contribution of $14,000 plus a section elective deferral in excess of $19,000 would exceed $33,000 (which is the sum of 100 percent of C's includible compensation plus the $5,000 additional age 50 catch-up amount).
Example 10.
(i) Facts illustrating that section elective deferrals cannot exceed compensation otherwise payable. Employee D is age 60, has includible compensation of $14,000, and wishes to contribute section elective deferrals of $20,000 for the year. No nonelective contributions are made for Employee D.
(ii) Conclusion. Because a contribution is a section elective deferral only if it relates to an amount that would otherwise be included in the participant's compensation, the effective limitation on section elective deferrals for a participant whose compensation is less than the basic dollar limit for section elective deferrals is the participant's compensation. Thus, D cannot make section elective deferrals in excess of D's actual compensation, which is $14,000, even though the basic dollar limit exceeds that amount.
Example 11.
(i) Facts illustrating calculation of the special section catch-up. For 2006, employee E, who is age 53, is eligible to participate in a section plan of hospital H, which is a section organization. H's plan permits section elective deferrals and provides for an employer contribution of 10 percent of a participant's compensation. The plan provides limitations on section elective deferrals up to the maximum permitted under , , and of this section. For 2006, E's includible compensation is $50,000. E wishes to elect to have the maximum section elective deferral possible contributed in 2006. E has previously made $62,000 of section elective deferrals under the plan, but has never made an election for a special section catch-up elective deferral. For 2006, the basic dollar limit for section elective deferrals under of this section is $15,000, the additional dollar amount permitted under the age 50 catch-up is $5,000, E's employer will make a nonelective contribution of $5,000 (10% of $50,000 compensation), and E is a qualified employee of a qualified employer as defined in of this section.
(ii) Conclusion. The maximum section elective deferrals that E may elect under H's section plan for 2006 is $23,000. This is the sum of the basic limit on section elective deferrals for 2006 under of this section equal to $15,000, plus the $3,000 maximum additional special section catch-up amount for which D qualifies in 2006 under of this section, plus the additional age 50 catch-up amount of $5,000. The limitation on the additional special section catch-up amount is not less than $3,000 because the limitation at of this section is $15,000 ($15,000 minus zero) and the limitation at of this section is $13,000 ($5,000 times 15, minus $62,000 of total deferrals in prior years). These conclusions would be unaffected if H were an eligible governmental employer under section that has a section eligible governmental plan and E were in the past to have made annual deferrals to that plan, because contributions to a section eligible governmental plan do not constitute elective deferrals; and these conclusions would also be the same if H had a section plan and E were in the past to have made elective deferrals to that plan, assuming that those elective deferrals did not exceed $10,000 ($5,000 times 15, minus the sum of $62,000 plus $10,000, equals $3,000), so as to result in the limitation at of this section being less than $3,000.
Example 12.
(i) Facts illustrating calculation of the special section catch-up in the next calendar year. The facts are the same as in Example 11, except that, for 2007, E has includible compensation of $60,000. For 2007, E now has previously made $85,000 of section elective deferrals ($62,000 deferred before 2006, plus the $15,000 in basic section elective deferrals in 2006, the $3,000 maximum additional special section catch-up amount in 2006, plus the $5,000 age 50 catch-up amount in 2006). However, the $5,000 age 50 catch-up amount deferred in 2006 is disregarded for purposes of applying the limitation at of this section to determine the special section catch-up amount. Thus, for 2007, only $80,000 of section elective deferrals are taken into account in applying the limitation at of this section. For 2007, the basic dollar limit for section elective deferrals under of this section is assumed to be $16,000, the additional dollar amount permitted under the age 50 catch-up is assumed to be $5,000, and E's employer contributes $6,000 (10% of $60,000) as a non-elective contribution.
(ii) Conclusion. The maximum section elective deferral that D may elect under H's section plan for 2007 is $21,000. This is the sum of the basic limit on section elective deferrals under of this section equal to $16,000, plus the additional age 50 catch-up amount of $5,000. E is not entitled to any additional special section catch-up amount for 2007 under of this section due to the limitation at of this section (16 times $5,000 equals $80,000, minus D's total prior section elective deferrals of $80,000 equals zero).
(d) Employer contributions for former employees
(1) Includible compensation deemed to continue for nonelective contributions For purposes of applying of this section, a former employee is deemed to have monthly includible compensation for the period through the end of the taxable year of the employee in which he or she ceases to be an employee and through the end of each of the next five taxable years. The amount of the monthly includible compensation is equal to one twelfth of the former employee's includible compensation during the former employee's most recent year of service. Accordingly, nonelective employer contributions for a former employee must not exceed the limitation of section up to the lesser of the dollar amount in section or the former employee's annual includible compensation based on the former employee's average monthly compensation during his or her most recent year of service.
(2) Examples The provisions of of this section are illustrated by the following examples:
Example 1.
(i) Facts. Private college M is a section organization operated on the basis of a June 30 fiscal year that maintains a section plan for its employees. In 2004, M amends the plan to provide for a temporary early retirement incentive under which the college will make a nonelective contribution for any participant who satisfies certain minimum age and service conditions and who retires before June 30, 2006. The contribution will equal 110 percent of the participant's rate of pay for one year and will be payable over a period ending no later than the end of the fifth fiscal year that begins after retirement. It is assumed for purposes of this Example 1 that, in accordance with and under the facts and circumstances, the post-retirement contributions made for participants who satisfy the minimum age and service conditions and retire before June 30, 2006, do not discriminate in favor of former employees who are highly compensated employees. Employee A retires under the early retirement incentive on March 12, 2006, and A's annual includible compensation for the period from March 1, 2005, through February 28, 2006 (which is A's most recent one year of service) is $30,000. The applicable dollar limit under section is assumed to be $44,000 for 2006 and $45,000 for 2007. The college contributes $30,000 for A for 2006 and $3,000 for A for 2007 (totaling $33,000 or 110 percent of $30,000). No other contributions are made to a section contract for A for those years.
(ii) Conclusion. The contributions made for A do not exceed A's includible compensation for 2006 or 2007.
Example 2.
(i) Facts. Private college N is a section organization that maintains a section plan for its employees. The plan provides for N to make monthly nonelective contributions equal to 20 percent of the monthly includible compensation for each eligible employee. In addition, the plan provides for contributions to continue for 5 years following the retirement of any employee after age 64 and completion of at least 20 years of service (based on the employee's average annual rate of base salary in the preceding 3 calendar years ended before the date of retirement). It is assumed for purposes of this Example 2 that, in accordance with and under the facts and circumstances, the post-retirement contributions made for participants who satisfy the minimum age and service conditions do not discriminate in favor of former employees who are highly compensated employees. Employee B retires on July 1, 2006, at age 64 after completion of 20 or more years of service. At that date, B's annual includible compensation for the most recently ended fiscal year of N is $72,000 and B's average monthly rate of base salary for 2003 through 2005 is $5,000. N contributes $1,200 per month (20 percent of 1/12th of $72,000) from January of 2006 through June of 2006 and contributes $1,000 (20 percent of $5,000) per month for B from July of 2006 through June of 2011. The applicable dollar limit under section is $44,000 for 2006 through 2011. No other contributions are made to a section contract for B for those years.
(ii) Conclusion. The contributions made for B do not exceed B's includible compensation for any of the years from 2006 through 2010.
Example 3.
(i) Facts. A public university maintains a section under which it contributes annually 10% of compensation for participants, including for the first 5 calendar years following the date on which the participant ceases to be an employee. The plan provides that if a participant who is a former employee dies during the first 5 calendar years following the date on which the participant ceases to be an employee, a contribution is made that is equal to the lesser of—
(A) The excess of the individual's includible compensation for that year over the contributions previously made for the individual for that year; or
(B) The total contributions that would have been made on the individual's behalf thereafter if he or she had survived to the end of the 5-year period.
(ii) Individual C's annual includible compensation is $72,000 (so that C's monthly includible compensation is $6,000). A $600 contribution is made for C for January of the first taxable year following retirement (10% of individual C's monthly includible compensation of $6,000). Individual C dies during February of that year. The university makes a contribution for individual C for February equal to $11,400 (C's monthly includible compensation for January and February, reduced by $600).
(iii) Conclusion. The contribution does not exceed the amount of individual C's includible compensation for the taxable year for purposes of section , but any additional contributions would exceed C's includible compensation for purposes of section .
(3) Disabled employees See also section which sets forth a special rule under which compensation may be treated as continuing for purposes of section for certain former employees who are disabled.
(e) Special rules for determining years of service
(1) In general For purposes of determining a participant's includible compensation under of this section and a participant's years of service under paragraphs (c)(3) (special section catch-up for qualified employees of certain organizations) and (d) (employer contributions for former employees) of this section, an employee must be credited with a full year of service for each year during which the individual is a full-time employee of the eligible employer for the entire work period, and a fraction of a year for each part of a work period during which the individual is a full-time or part-time employee of the eligible employer. An individual's number of years of service equals the aggregate of the annual work periods during which the individual is employed by the eligible employer.
(2) Work period A year of service is based on the employer's annual work period, not the employee's taxable year. For example, in determining whether a university professor is employed full time, the annual work period is the school's academic year. However, in no case may an employee accumulate more than one year of service in a twelve-month period.
(3) Service with more than one eligible employer
(i) General rule With respect to any section contract of an eligible employer, except as provided in of this section, any period during which an individual is not an employee of that eligible employer is disregarded for purposes of this .
(ii) Special rule for church employees With respect to any section contract of an eligible employer that is a church-related organization, any period during which an individual is an employee of that eligible employer and any other eligible employer that is a church-related organization that has an association (as defined in section ) with that eligible employer is taken into account on an aggregated basis, but any period during which an individual is not an employee of a church-related organization or is an employee of a church-related organization that does not have an association with that eligible employer is disregarded for purposes of this .
(4) Full-time employee for full year Each annual work period during which an individual is employed full time by the eligible employer constitutes one year of service. In determining whether an individual is employed full-time, the amount of work which he or she actually performs is compared with the amount of work that is normally required of individuals performing similar services from which substantially all of their annual compensation is derived.
(5) Other employees
(i) An individual is treated as performing a fraction of a year of service for each annual work period during which he or she is a full-time employee for part of the annual work period and for each annual work period during which he or she is a part-time employee either for the entire annual work period or for a part of the annual work period.
(ii) In determining the fraction that represents the fractional year of service for an individual employed full time for part of an annual work period, the numerator is the period of time (such as weeks or months) during which the individual is a full-time employee during that annual work period, and the denominator is the period of time that is the annual work period.
(iii) In determining the fraction that represents the fractional year of service of an individual who is employed part time for the entire annual work period, the numerator is the amount of work performed by the individual, and the denominator is the amount of work normally required of individuals who perform similar services and who are employed full time for the entire annual work period.
(iv) In determining the fraction representing the fractional year of service of an individual who is employed part time for part of an annual work period, the fractional year of service that would apply if the individual were a part-time employee for a full annual work period is multiplied by the fractional year of service that would apply if the individual were a full-time employee for the part of an annual work period.
(6) Work performed For purposes of this , in measuring the amount of work of an individual performing particular services, the work performed is determined based on the individual's hours of service (as defined under section ), except that a plan may use a different measure of work if appropriate under the facts and circumstances. For example, a plan may provide for a university professor's work to be measured by the number of courses taught during an annual work period in any case in which that individual's work assignment is generally based on a specified number of courses to be taught.
(7) Most recent one-year period of service For purposes of of this section, in the case of a part-time employee or a full-time employee who is employed for only part of the year determined on the basis of the employer's annual work period, the employee's most recent periods of service are aggregated to determine his or her most recent one-year period of service. In such a case, there is first taken into account his or her service during the annual work period for which the last year of service's includible compensation is being determined; then there is taken into account his or her service during his or her next preceding annual work period based on whole months; and so forth until the employee's service equals, in the aggregate, one year of service.
(8) Less than one year of service considered as one year If, at the close of a taxable year, an employee has, after application of all of the other rules in this , some portion of one year of service (but has accumulated less than one year of service), the employee is deemed to have one year of service. Except as provided in the previous sentence, fractional years of service are not rounded up.
(9) Examples The provisions of this are illustrated by the following examples:
Example 1.
(i) Facts. Individual G is employed half-time in 2004 and 2005 as a clerk by H, a hospital which is a section organization. G earns $20,000 from H in each of those years, and retires on December 31, 2005.
(ii) Conclusion. For purposes of determining G's includible compensation during G's last year of service under of this section, G's most recent periods of service are aggregated to determine G's most recent one-year period of service. In this case, since D worked half-time in 2004 and 2005, the compensation D earned in those two years are aggregated to produce D's includible compensation for D's last full year in service. Thus, in this case, the $20,000 that D earned in 2004 and 2005 for D's half-time work are aggregated, so that D has $40,000 of includible compensation for D's most recent one-year of service for purposes of applying , , and of this section.
Example 2.
(i) Facts. Individual H is employed as a part-time professor by public University U during the first semester of its two-semester 2004-2005 academic year. While H teaches one course generally for 3 hours a week during the first semester of the academic year, U's full-time faculty members generally teach for 9 hours a week during the full academic year.
(ii) Conclusion. For purposes of calculating how much of a year of service H performs in the 2004-2005 academic year (before application of the special rules of and of this section concerning less than one year of service), of this section is applied as follows: since H teaches one course at U for 3 hours per week for 1 semester and other faculty members at U teach 9 hours per week for 2 semesters, H is considered to have completed 3⁄18 or 1⁄6 of a year of service during the 2004-2005 academic year, determined as follows:
(A) The fractional year of service if H were a part-time employee for a full year is 3/9 (number of hours employed divided by the usual number of hours of work required for that position).
(B) The fractional year of service if H were a full-time employee for half of a year is 1⁄2 (one semester, divided by the usual 2-semester annual work period).
(C) These fractions are multiplied to obtain the fractional year of service: 3⁄9 times 1⁄2, or 3⁄18, equals 1⁄6 of a year of service.
(f) Excess contributions or deferrals
(1) Inclusion in gross income Any contribution made for a participant to a section contract for the taxable year that exceeds either the maximum annual contribution limit set forth in of this section or the maximum annual section elective deferral limit set forth in of this section constitutes an excess contribution that is included in gross income for that taxable year. See and for additional rules, including special rules relating to contracts that fail to be nonforfeitable. See also section for an excise tax applicable with respect to excess contributions to a custodial account and section for a special rule applicable if excess matching contributions, excess after-tax employee contributions, and excess section elective deferrals do not exceed $100.
(2) Separate account required for certain excess contributions; distribution of excess elective deferrals A contract to which a contribution is made that exceeds the maximum annual contribution limit set forth in of this section is not a section contract unless the excess contribution is held in a separate account which constitutes a separate account for purposes of section . See also and of this section for additional rules with respect to the requirements of section and any excess deferral.
(3) Ability to distribute excess contributions A contract does not fail to satisfy the requirements of , the distribution rules of or , or the funding rules of solely by reason of a distribution made from a separate account under of this section or made under of this section.
(4) Excess section 403(b) elective deferrals A section contract may provide that any excess deferral as a result of a failure to comply with the limitation under of this section for a taxable year with respect to any section elective deferral made for a participant by the employer will be distributed to the participant, with allocable net income, no later than April 15 of the following taxable year or otherwise in accordance with section . See section for rules permitting the participant to allocate excess deferrals among the plans in which the participant has made elective deferrals, and see section for special rules to determine the tax treatment of such a distribution.
(5) Examples The provisions of this are illustrated by the following examples:
Example 1.
(i) Facts. Individual D's employer makes a $46,000 contribution for 2006 to an individual annuity insurance policy for Individual D that would otherwise be a section contract. The contribution does not include any elective deferrals and the applicable limit under section is $44,000 for 2006. The $2,000 section excess is put into a separate account under the policy. Employer includes $2,000 in D's gross income as wages for 2006 and, to the extent of the amount held in the separate account for the section excess contribution, does not treat the account as a contract to which section applies.
(ii) Conclusion. The separate account for the section excess contribution is a contract to which section applies, but the excess contribution does not cause the rest of the contract to fail section .
Example 2.
(i) Facts. Same facts as Example 1, except that the contribution is made to purchase mutual funds that are held in a custodial account, instead of an individual annuity insurance policy.
(ii) Conclusion. The conclusion is the same as in Example 1, except that the purchase constitutes a transfer described in section .
Example 3.
(i) Facts. Same facts as Example 1, except that the amount held in the separate account for the section excess contribution is subsequently distributed to D.
(ii) Conclusion. The distribution is included in gross income to the extent provided under section relating to distributions from a section contract.
Example 4.
(i) Facts. Individual E makes section elective deferrals totaling $15,500 for 2006, when E is age 45 and the applicable limit on section elective deferrals is $15,000. On April 14, 2007, the plan refunds the $500 excess along with applicable earnings of $65.
(ii) Conclusion. The $565 payment constitutes a distribution of an excess deferral under of this section. Under section , the $500 excess deferral is included in E's gross income for 2006. The additional $65 is included in E's gross income for 2007 and, because the distribution is made by April 15, 2007 (as provided in section ), the $65 is not subject to the additional 10 percent income tax on early distributions under section .
[T.D. 9340, 72 FR 41144, July 26, 2007, as amended by 72 FR 54352, Sept. 25, 2007; 75 FR 65566, Oct. 26, 2010]