Even now, as we hear rumblings that a “universal 401(k)” arrangement may once again be in the wings under any Tax Reform package considered by the new Congress, we again are reminded on how ingrained the differences are between the various types of retirement plans. There are reasons these plans, and the differences between them, exist.   One of the most unusual differences, and hidden, differences between 403(b) plans and 401(k) plans is the striking fact that the 415 limit is an individual limit, not a plan level limit.  The reason: 403(b) plans are still fundamentally designed around an individual.

It is this sort of design which also should suggest it as a potential design of choice for the future: with the focus growing on individual portability of the retirement benefit, it’s easy to forget that these individual contracts were portable between plans. This individual control, with now-defunct Rev Rule 90-24 made it simple for the individual to transfer their funds between contracts. This is the sort of thing we are looking for plan accounts to do in the future. When you actually work through the details, you may be surprised to find that you’ll find out that the 403(b) contract (as they existed prior tenth 2007 tax regulations) actually solves for a combination of easy portability which accommodates lifetime income.

So, back to the 415 “limitation year.” It’s that time of year when we start looking to correct 415 excesses. One off the issues which inevitably comes up in any book of business is the limitation year, and whether or not it should be changed. To change it, you simply amend the plan document, and follow the regulations about the manner in which to apply it.

A 403(b) plan has no such choice. If, for any one of a number of reasons, it chooses to change its limitation years (keeping in mind that a significant number of 403(b) plans have fiscal plan years, which may drive such choices), it cannot do so by simply amending the plan. You see, the limitation year is determined on a person by person basis, it is not a plan wide rule. Only the individual can change the limitation year, and only for its contracts. To change the year, the individual must attach a statement to his or her income tax return filed for the taxable year in which the change is made. To change a plan’s limitation year, the administrator would need each employee to make that 1040 filing.

Pretty amazing. It means that the participant is actually in control, and any participant has the ability to change their own limitation year-which would, if anyone really tried to do it, make a mess of the plan’s administration. I suspect that a plan may be able to limit this right by its terms, but I would also suspect that the limitation should then be in the plan document.

The exception to the rule is those instances where the participant is “in control” of an employer (a concept used to determine when to aggregate 403(b) plans for 415 purposes). In such cases, the limitation year is the limitation years  of the employer over which the participant has control.

This rule, by the way actually makes a great deal of sense form a pure policy standpoint, especially if you are seeking a “universal account” solution to retirement plans.