(b)lines Ask the Experts – An Employee Wants to Defer 100%

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:    

In theory yes, but in practice, not quite. Although the 415 regulations, which govern the total amount of annual additions (employer contributions, employee elective deferrals, and forfeitures) that may be made to a plan, increased several years ago so that up to 100% of pay could be contributed, there are other restrictions that will effectively prevent the individual from deferring her entire paycheck to the plan.   

The first issue is federally mandated deductions, such as those required FICA and FICA Medicare withholdings. These deductions must be taken prior to the 403(b) elective deferral, so a deferral of one’s entire pay is not possible. In addition, the plan document’s definition of compensation may be reduced by other deductions as well, which means that the compensation is reduced by those deductions prior to the 403(b) elective deferral being taken.   

Finally, the elective deferral limit of $16,500 ($22,000 if age 50 or older) for 2011 will come into play if the total amount that the individual defers into the 403(b) in a calendar year reaches that limit at any point. For example, if she ends up earning say, $30,000, in plan eligible compensation after required deductions in 2011, only $16,500 ($22,000 if age 50 or older) of that $30,000 may be deferred into the 403(b).  

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.