Special Rules About Contributions

Saving for retirement seems pretty simple. You set aside contributions each month, and they slowly accumulate in an investment account. Most of the time, it is really straightforward as far as saving goes! Here are some exceptions to the typical way of setting aside contributions.

Special Rules for Post-severance Compensation

Generally, contributions to a retirement plan can only be made from compensation received prior to severance of employment; however, within the final Code section 415 regulations, the IRS allows for certain exceptions to the “prior to termination” requirement. Compensation can include:

Regular compensation paid by the later of 2½ months after severance of employment or the last day of the limitation year (generally the calendar year) in which the employee terminated.*
“Regular compensation” means compensation the participant would have received (salary, commissions, overtime, shift-differential, bonuses, etc.) if the participant’s employment had continued.
Severance pay and other non-regular compensation, such as payments of nonqualified deferred compensation plans made because of the severance of employment, cannot be counted as post-severance compensation.
Payments for unused accrued sick leave, vacation pay or other leave that is paid by the later of 2½ months after severance of employment or the last day of the limitation year in which the employee terminated, if the employee could have used the leave if employment had continued.**
Payments for nonqualified deferred compensation plans that are paid by the later of 2½ months after severance of employment or the last day of the limitation year in which the employee terminated, as long as the payments would have been received at the same time if employment had continued.**
Salary continuation paid to former employees who are in the United States military or are permanently and totally disabled as defined by the Internal Revenue Code, regardless of whether such compensation is received after severance of employment and without the 2½-month limitation.
*Unless the plan provides otherwise
**If provided for under the terms of the plan

Special Increased Limitation Rule for 403(b) Church Plans

Under the special increased limitation rule for church plans, annual contributions to a section 403(b) plan for an employee of a church or church-related employer (such as a seminary, church-related college, church-related hospital, etc.) are treated as not exceeding the contribution limitation of section 415(c) if the contributions for the year do not exceed $10,000, regardless of the employee’s compensation, with a lifetime limit of $40,000.

For instance, if an employee has no taxable compensation because of minister’s housing allowance, his employer still may be able to contribute $10,000 for the employee for the year. However, the lifetime limit of $40,000 still applies to the employee for purposes of this rule, but the cumulative total applies only to amounts that are in excess of the employee’s general section 415 limit (or basic limit).

Limitation Rule Allows Foreign Missionaries a Partial Exclusion from Lifetime Cap

The IRS also allows an exception within the special increased limitation rule for church employees performing services outside the United States (e.g., foreign missionaries). Under this ContributionLimits exception, contributions to a section 403(b) plan for any year are not treated as exceeding the limitations of section 415(c) if the contribution does not exceed $3,000 (but only if the individual’s adjusted gross income (AGI) does not exceed $17,000 — applied separately and without regard to community property laws).

Therefore, if a foreign missionary is using the special rule described above, a missionary with an AGI below $17,000 can have annual contributions of $10,000 with only $7,000 a year applied toward the $40,000 lifetime cap. To maximize the $40,000 cap, $10,000 can be contributed for a foreign missionary for five years (with only $7,000 actually applied), and then $8,000 for one year (with only $5,000 actually applied), before the foreign missionary reaches the $40,000 lifetime cap and begins contributing only $3,000 a year going forward.

Illustration for foreign missionary

Year	Total Contributions	Amount applied to $40,000 lifetime cap	Accumulated $40,000 lifetime cap
1	$10,000	$7,000	$7,000
2	$10,000	$7,000	$14,000
3	$10,000	$7,000	$21,000
4	$10,000	$7,000	$28,000
5	$10,000	$7,000	$35,000
6	$8,000	$5,000	$40,000

Correction of Excesses

Plan sponsors should use the Employee Plans Compliance Resolution System (EPCRS) program for correction of excess contributions.

Aggregation for 403(b) Plans

Generally, a section 403(b) plan is not aggregated with qualified plans that are maintained by the participant’s employer or with 403(b) plans of other employers because the section 403(b) annuity contract is considered to be maintained by the participant and not the employer for purposes of section 415.

However, if a participant with a 403(b) plan is in control (i.e., owns a significant portion) of any employer for a limitation year, the section 403(b) plan must be aggregated with all other defined contribution plans maintained by the participant-controlled employer. In addition, it appears that 403(b) plans of other employers may need to be aggregated as well in the case where a participant is in control of an employer. Accordingly, the employer that contributes to the section 403(b) plan must obtain information from participants regarding employers controlled by those participants and plans maintained by those controlled employers (and possibly other 403(b) plans) to monitor compliance with applicable limitations.

GuideStone^® can help with reviewing aggregation across plans through our contribution limit calculation services.

Quick recap:

Saving for retirement is pretty simple — but there are always exceptions for special circumstances!
After you leave employment, you may still receive contributions within certain exceptions outlined by the IRS.
The special increased limitation rule for church plans benefits those that may have no taxable income by allowing eligibility for contributions.
Foreign missionaries also benefit from this rule and go a step further with a partial exclusion of contributions from the lifetime cap.
Aggregation of plans may be required if the plan(s) are maintained by a participant-controlled employer.
GuideStone can help through our contribution limit calculation services.

For more information on these special rules and contribution limit calculation services, please contact GuideStone at 1-888-98-GUIDE (1-888-984-8433) between the hours of 7 a.m. and 6 p.m. CT, Monday–Friday.

The general information in this publication is not intended to be nor should it be treated as tax, legal or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction, and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.