What is Required When Executing a Salary-Reduction Agreement?

Q: Can participants execute a salary-reduction agreement in a 403(b) plan which states that they are deferring “the 402(g) limit” or the “legal maximum?” Or must a specific percentage or flat dollar amount be provided?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: There is nothing in Internal Revenue Code Section 403(b) or its regulations (or, for that matter, in Code Section 401(k) and its regulations) that requires participants to state a specific flat dollar or percentage amount when making a salary deferral election under a salary reduction agreement. Thus, if a plan document permits an election for the maximum deferral amount under the law, rather than providing for an election of a dollar amount or percentage of salary, then such deferral elections are technically permitted.

Having said that, permitting elections using terms such as “the 402(g) limit” or the “legal maximum” may raise administrative complications that depend on the administrative systems of your third-party administrator or recordkeeper, because 403(b) plans often feature multiple overlapping contribution caps. For instance, many 403(b) plans allow catch-up elections (age 50, age 60-63, and/or 15-year.) If a participant is eligible for catch-up contributions, it may be unclear whether an election to defer “the 402(g) limit” includes available catch-up elections. Without a defined dollar amount or percentage, the plan administrator may be forced to make assumptions about a participant’s intent.

In short, while executing a salary reduction agreement in which the participant elects to defer “the 402(g) limit” or the “legal maximum” may be technically permitted under the tax code, there may be practical administrative hurdles in implementing such an election in a 403(b) plan.

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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