There is a little noticed change in the IRS’s recent update of Publication 571 (which is the IRS’s 403(b) technical guide). In a highlighted box on page 4 is the following, under how the limits on “annual additions”-otherwise known as the 415 limits- apply:
More than one 403(b) account. If you contributed to more than one 403(b) account, you must combine the contributions made to all 403(b) accounts maintained by your employer. If you participate in more than one 403(b) plan maintained by different employers, you don’t need to aggregate for annual addition limits.
This innocuous seeming statement is actually pretty outstanding, finalizing a quiet morphing over a generation of the way the IRS applies a regulation in a way we rarely see. The change: the employee is effectively no longer considered the employer for 415/403(b) purposes, but the rules have not really changed. In Gemology, according to Evan Giller-who first put me on notice to this “gem” of a change in 571- this type of change would be considered a “pseudomorph.” Pseudomorph is the name given to a crystal (or other gem) where one mineral replaces the mineral which actually formed the crystal without actually changing the the form or shape of the crystal.
Okay, I admit to taking some literary license with the analogy, but it seems appropriate here.
1.415(f)-(1)(f) of the tax regulations reflects its history: “the participant, and not the participant’s employer who purchased the section 403(b) annuity contract, is deemed to maintain the annuity contract…” This technically means that the employee is the employer for 415 purposes, and that all contributions to all 403(b) contracts of an individual count against the 415 limit-regardless of which employer plan it came from. For those who were around back then, I seem to recall that this was also the way we would run the 403(b) Maximum Exclusion Allowance (the now extinct “MEA”).
With the demise of the MEA, and with the growing focus of the IRS on employer accountability, we saw a shift over the years to treating the 415 limit as an employer-based limit, not an individual limit. This actually makes a lot of sense, as this limit is virtually impossible to enforce if applied beyond an employer.
The 2007 403(b) regulations actually were a bit ambiguous on this point, as they never touched on that pesky 415 reg. It only mandated the aggregation of 403(b) contracts of the same employer (with the exception of other companies under the participant’s control). There has always been this uncertainty since then, because if the employee was the employer (as per 415), it still was an individual limit. The question was whether we could now effectively read the new 403(b) reg together with the old 415 reg to apply the 415 limit on an employer by employer basis, rather than treating the employee as the employer. The language under 415 could actually be read that way, if looked at generously (I guess).
Publication 571 seems to have solved this for us. It appears that the transition is now complete. There is no 415 aggregation of contributions to 403(b) contracts from unrelated employers (except, of course, for that weird “control” rule). A Pseudomorph….