(b)lines Ask the Experts – When a Deferral is not “Elective”

February 8, 2011 (PLANSPONSOR (b)lines) – “I was told that the “mandatory” salary reduction contribution provided for in my employer’s 403(b) plan does NOT count against the 402(g) elective deferral limit. Is this correct?”
By PS

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

That is correct. The “mandatory” contribution, though it is a salary reduction, is actually NOT an elective deferral. The reason is that Code Section 402(g) and related regulations provide for an exception from the elective deferral limit for so-called “mandatory” salary reduction contributions that are: a) a condition of employment, or b) pursuant to a one-time irrevocable election by the employee at the time of initial eligibility to participate in the salary reduction agreement. The election must be truly irrevocable; if the employee can change his/her mind at any time in the future and be permitted to make the “mandatory” contribution, the contribution would then be considered to be an elective deferral subject to the $16,500 402(g) limit.  

It should be noted that this “mandatory” contribution is considered to be an employer contribution for nondiscrimination testing purposes, but NOT for tax withholding purposes. Thus, FICA would be withheld from such contributions.  

 

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. 

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