How do I make sure I understand contribution limits?
Be aware that the Contribution Limits are higher than many Participants can use. However, there are a number of circumstances where increased contributions can be important.
Also be aware that retirement plan account types need to be added together (aggregated) to determine the applicable contribution limits. For example, in 2020, the elective deferral limit will be $19,500. An employee who contributes $9,500 to an after-tax Roth 403(b) or 401(k) account could only contribute $10,000 to their before-tax Traditional 403(b) or 401(k) account. Roth 403(b) and 401(k) contributions are part of the $19,500 limit, not in addition to the before-tax contributions. In other words, no double dipping!
If you contributed to a 403(b) or 401(k) account, you may still contribute to a Roth IRA and a Traditional IRA. However, your participation in your employer-sponsored retirement plan may affect your ability to take a tax deduction for any Traditional IRA contributions.
- Elective Deferral Limits - §402(g) Limits - Employee Voluntary Contributions - $19,500
- Age 50 Catch-Up Provision - §414(v) Limits - in addition to the Elective Deferral Limits above - $6,500
- 15 Years of Service Catch-Up Provision - §402(g)(7) Limits - in addition to the Elective Deferral Limits above, (403(b) plans only, see dialog below*) - $3,000
- Maximum Combined Employee and Employer - §415 Limits - $57,000 (or 100% of Includible Compensation - apply the lesser of the two)
- Maximum Combined Employee and Employer (with Age 50 Catch-Up Contributions) - §415 Limits - $63,500 (or 100% of Includible Compensation - apply the lesser of the two)
- IRC 415(c)(7) Catch-Up Option (seldom used but nonetheless available, 403(b) plans only, see dialog below **) $10,000 per year Employer Contribution for very low-income employees
* Certain 501(c)(3) organizations that sponsor 403(b) plans are eligible for the use of the "15 Years of Service Catch-Up Provision".
Those eligible employers are limited to five groups:
1. Educational institutions
3. Churches and church-affiliated organizations
4. Home health service agencies; and
5. Health and welfare agencies
The criteria for determining who is eligible for the "15 Years of Service Catch-Up Provision" is as follows:
1. The participant will have to reach the 15 years of service anniversary date by the end of the current tax year.
2. Years of service can only be counted with their current employer, except for the employees of religious organizations where years of service are counted within the denomination.
3. Participants who have contributed, on average, $5,000 or more for each year of service leading up to the 15 years, are not eligible to use the increased contribution limit.
4. The increased limit for the "15 Years of Service Catch-Up" can be used with the current employer only until $15,000 in "extra" contributions have been made. At that time, the "extra" contributions will need to cease.
** The "§415(c)(7) Catch-Up Provision" permits up to $10,000 per year to be contributed to a 403(b) plan until a total of $40,000 has been used under this limit. It will apply to very low-income employees for whom the religious organization wishes to make employer contributions. Example: Pastor preaches for a small congregation once a month and receives compensation of $2,400 per year for those services. Pastors cannot afford to make elective deferrals to a 403(b) plan; however, the church wishes to recognize his many years of faithful service. The church can make a contribution on behalf of Pastor to a 403(b) plan of up to $10,000 each year until the $40,000 limit has been utilized. After that, the church could continue to contribute on behalf of the Pastor, subject to the "100% of Includable Compensation" §415 limitations.
Other Important Information
1. For those participants who are maximizing their voluntary contributions (using the maximum Elective Deferral, the 15 Years of Service Catch-Up Provision and the Age 50 Catch-Up Provision, subsequently equaling $28,000 in contributions), the IRS has established "ordering rules". Under these ordering rules, individuals using both "extra" contributory limits will be considered to be using the "15 Years of Service" limit first.
2. If a participant is age 50+ and is eligible to use the 15 Years of Service limit contributed (for example) $3,000 more than the elective deferral limit, he/she will be using the 15 years of service increase - not the age 50 Catch-Up.
3. Naturally, if the participant is not eligible for the 15 years of service increased contribution limit, the age 50 Catch-Up will apply to salary reduction contributions made in excess of the basic limit.
4. Includible Compensation / Housing Allowance - among the most frequently asked questions about compensation for the purposes of the 403(b) contribution limits are whether a minister's housing allowance can be included in compensation for purposes of the maximum annual contribution calculation (100% of Includible Compensation). The answer is "no" because the housing allowance is not a taxable benefit. Section 107 of the Code specifically states that housing allowance is not includible in gross income; hence is not subject to taxation.
To claim the credit, your employee must be at least 18 years old and not a full-time student or a dependent on another taxpayer's return.