(b)lines Ask the Experts – Year-End Action Items for 403(b)s

David Levine, with Groom Law Group, answers: 

Plan sponsors should review their 403(b) plans for compliance with document and operational requirements for the 2016 plan year now during December to avoid having to make corrections in 2017.  For example, if any optional (i.e., “design”) changes were implemented during 2016, a plan amendment should be adopted by December 31. 

Also, if a new safe harbor employer matching contribution for 2017 was approved, the plan must be amended by December 31 for safe harbor protection to be effective for 2017. Plan sponsors should also take time this month to review plan operations for 2016 to ensure compliance with Internal Revenue Code (IRC) requirements, in particular (but not limited to) the following:

• Excess IRC Section 402(g) contributions. – Participant deferral contributions are limited to $18,000 for 2016. Participants who were 50 years of age at any time during 2016 may defer an additional $6,000 in catch-up contributions for a total of $24,000 in deferral contributions.
• Excess IRC Section 415(c) contributions. – Total contributions (excluding any catch-up contributions) on behalf of any one participant for 2016 may not exceed $53,000.
• Compensation in excess of IRC Section 401(a)(17) limit. – Participant compensation for purposes of calculating contributions is limited to $265,000 for 2016.
• Special Catch-up Contributions. – Participants in certain plans with qualifying employers and at least 15 years of service with the plan sponsor may be eligible to make special catch-up contributions up to $3,000 in any taxable year, but generally only to the extent there was unused salary deferral limits from prior years, and with a lifetime limit of $15,000. This requires a complicated calculation. If both this catch-up limit and the age 50 catch up limit apply, this limit is applied first.
• Year-End Contribution Adjustments. – If the plan provides for an annual match or employer contribution but the plan sponsor made the contributions throughout 2016 instead, true-up calculations should be done. Some participants might be owed an additional amount on an annual basis, while others might need to have their December contributions adjusted downward.
• Required Minimum Distributions (RMDs). – Participants who began taking RMDs on or before April 1, 2016 are owed a RMD for 2016 by December 31, 2016.
• Universal availability. – All eligible employees under IRC Section 403(b)(12) must be offered the opportunity to elect to make deferral contributions for 2017.
• Automatic enrollment. – If your plan has automatic enrollment, it is a good idea to confirm that proper notices have been given at that it is being implemented correctly, such as that any automatic increases are being made.

There are, of course, other document and operational issues that should be reviewed from time to time, such as plan loan and hardship distribution problems and whether updates to the annuity contract and summary plan description are necessary.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.