Maximum contribuition for 403B & SEP IRA combined?

[MRPLOW]

I have a client that has contributed $17,000 to a 403B plan(Box E) through his W-2 wages at his employer. Client also has Schedule C earnings of $250,000.

SEP IRA maximum contribution for 2012 is $50,000. Is this $50,000 reduced by the $17,000 contributed to his 403B plan through his empolyer?

I have read the publications and researched all the threads and its seems that there are conflicting opinions on here.

[Bees Knees]

1) If net Schedule C profit is $200,000, the max SEP is $40,000, not $50,000. Self-employed taxpayers use 20% of net SE earnings (reduced by one-half SE tax deduction), not the 25% rate that applies to employees.

2) The max contribution limit for all combined plans that include a defined contribution plan in 2012 is the lesser of 100% of combensation, or $50,000. The $50,000 contribution limit includes employee elective deferrals to a 401(k) or 403(b) plan. [IRC §415(c)(1)]

[MRPLOW]

"Bees Knees" Net earnings were actually over $250,000. I have corrected my first post to reflect that. Sorry for the confusion.

[New York Enrolled Agent]

2) The max contribution limit for all combined plans that include a defined contribution plan in 2012 is the lesser of 100% of combensation, or $50,000. The $50,000 contribution limit includes employee elective deferrals to a 401(k) or 403(b) plan. [IRC §415(c)(1)]

Bees

If I'm reading your post correctly, I will disagree with your apparent integration of the 403(b) contribution and the SEP plan.

The §415 contribution limit is per employer and not per employee. MRPLOW's post would indicate there is no common ownership issue - thus I believe the §403(B) with the first employer does not impact on the taxpayer's ability to fully fund the SEP based on the stated earned income.

[Snaggletooth]

Employer and Employee Combined

See IRC§415(c) The $50,000 limit includes not only employer contributions but employee contributions as well, even includes
"Agency Automatic" contributions. Applies whether deducted pre-tax or not. Appears that the $50,000 is all-encompassing.

[New York Enrolled Agent]

See IRC§415(c) The $50,000 limit includes not only employer contributions but employee contributions as well, even includes
"Agency Automatic" contributions. Applies whether deducted pre-tax or not. Appears that the $50,000 is all-encompassing.

Snags

There is no disagreement that the "annual additions" include both employer and employee contributions in determing the $50,000 limit. My contention is that this "annual additions" limit is not an overall limit for an employee who may be fortunate to have multiple generous employers.

If there are multiple employers (always assuming no common ownership), the elective employee deferrals under §402(g) are integrated across all employer plans but the §415(c) limitations are per employer. Actually, there may be some arcane rules on certain 403(b) plans but I believe the general notion of the §415 limitation is done on an employer basis. Thus a lucky employee could actually have more than $50,000 in contributions when there are multiple employers.

[Bees Knees]

If there are multiple employers (always assuming no common ownership), the elective employee deferrals under §402(g) are integrated across all employer plans but the §415(c) limitations are per employer. Actually, there may be some arcane rules on certain 403(b) plans but I believe the general notion of the §415 limitation is done on an employer basis. Thus a lucky employee could actually have more than $50,000 in contributions when there are multiple employers.

I seem to remember getting into an argument with Old Jack and Jainen many years ago over this issue. I think in the end we agreed that unrelated employers do not have to worrry about how much another employer contributed with respect to their employees. But I seem to also remember some stumbling block if one of the employers is actually the taxpayer's own self-employment activity. I'm not sure how, but if this is a sole proprietor wanting to do a max SEP in addition to the 403(b) plan through his/her employer, my advice is to seek professional help from a pension plan expert.

[Roland Slugg]

My advice is to seek professional help from a pension plan expert.

That's probably good advice! It should be possible to read the Code and one or two good tax handbooks and figure this out for ourselves. But the code and all the handbooks I've seen contain so many "except for" and "notwithstanding" qualifiers, that it soon becomes a hopeless undertaking.

Having said that, based on my reading of everything related to the issues, I can find nothing that says the limit for two (or more) unrelated employers must be combined into one overall limit, that being the higher of the two. Accordingly, I am inclined to believe that when a taxpayer is a participant in a 401(k) or a 403(b) plan with one employer, as well as a SEP-IRA with another employer ... i.e. his own business ... that each "employer's" limit applies separately. If this is correct, then the taxpayer in question in this thread should be able to contribute $17k to employer A's 403(b) plan, and also benefit from employer B's (his own company) contribution of $50k to its SEP.

I realize that "my old man can beat up your old man" arguments never produce a clear consensus (unless the two "old men" actually get it on and duke it out), but regarding this issue I'm standing in NYEA's corner.

Regarding Bees' suggestion that there may once have been special rules (and perhaps special limits for 403(b) plans when the same taxpayer was also covered by another plan), that is definitely true. But starting in about 2007 or 2008 the rules for 403(b) plans were brought pretty much into alignment with the rules for other kinds of plans.

[MRPLOW]

This seems like it should be such a simple question, yet neither IRS code or TTB has clear guidance on this issue, and opinions are all over the board...

[Bees Knees]

This seems like it should be such a simple question, yet neither IRS code or TTB has clear guidance on this issue, and opinions are all over the board...

Its not a simple question when less than 1% of all taxpayers are affected by the rules. How many people actually earn enough money from a W-2 job to max out on their 401(k) or 403(b) plan, AND earn enough from a Schedule C business to hit the max on a SEP?

As to the limit not applying to multiple employers, IRC §415(f) says all defined contribution plans of an employer are to be treated as one defined contribution plan, which is what seems to indicate that different employers can max out on the limits without worrying about other employers. However, IRC §415(g) goes on to talk about the aggregation of plans, and that if the participant has any control over multiple plans, see the regulations.

Again, my advice is see an expert. As a tax preparer, I don't think it is our job to decide what is meant by a participant's control over multiple plans. I could see some hidden reg or ruling that says if the participant has control over his elective deferrals in one plan, and over 50% ownership in another (such as a self-employed SEP), then that could be a factor. I don't know. Any pension plan experts out there that have fully researched this little quirk in the law?

[Roland Slugg]

As a tax preparer, I don't think it is our job to decide what is meant by a participant's control over multiple plans. I could see some hidden reg or ruling that says if the participant has control over his elective deferrals in one plan, and over 50% ownership in another (such as a self-employed SEP), then that could be a factor.

Yes, that is a possibility, I agree. But there was no indication in the OP that the taxpayer in question has "control" ... however that may be defined ... over his 403(b) employer. Most 403(b) plans are established by public schools, so it would be impossible for any employee to have the requisite control. 403(b) plans can also be established by certain tax-exempt organizations, so that is also a possibility. I believe it is reasonable to assume, however, that if the 403(b) employer in this case were a tax-exempt organization, over which the taxpayer had significant control, that the OP would have mentioned that ... or so I would hope.

[Bees Knees]

But there was no indication in the OP that the taxpayer in question has "control" ...

All employees have control over their own elective deferrals. When you work for a non-profit organization that has a 403(b) plan, you the employee are the one that decides how much, if any, of your salary is contributed to the plan.

[Roland Slugg]

That is true. And there may be some hard-to-find section in the Code or Regs covering this. However, I have looked and can not find any such combined limitation when there are two different employers. The Code/Regs make multiple references to an employer or the employer but don't say anything about all employers ... at least nothing I have managed to unearth.

In any case I second your twice mentioned advice about asking a pension plan specialist, since no one here seems to be absolutely sure.

[Gary2]

I suggest looking at Pub. 571, reading all of Chapter 2, and then the intro section of Chapter 3 under "Participation in a qualified plan" and Chapter 4 under "403(b) plan and another retirement plan." The Chapter 4 item is the general rule that the $17K limit applies to elective deferrals across all plans, made more confusing because most SEPs don't have what would be considered elective deferrals.

This may not answer the question, or make things clearer, but I think it will establish that there's an issue to worry about.