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403(b) Contribution Limits And Formulas

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I'm trying to determine a matching contribution formula and limit for my 501©(3) organization's retirement plan. When I called the IRS they told me about the Safe Harbor rule and mentioned that matching 100% of contributions up to 6% of salary is at the upper limits of what most companies do.


If that's the case, how could anyone every reach the $40,000 annual limit? If I contribute $13,000 as an employee and the employer can only match 6%, I'd have to be making $450,000 in order for that 6% limit to hit $27,000 and bring the total to $40,000. Am I missing something?


I'm interested in letting employees contribute as much as they want up to $13,000 and then having the employer match that 100%. Do I need to have a limit on matching based on % of compensation? Can that maximum be 10%? 15%? 20%?


We only have 3 employees and we'd all like to save as much as we can. Since matching also reduces FICA for the employer, I'd like as high a limit as possible.


Thanks for your feedback.

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Guest Chuck Yanikoski

As a 501©(3), you are subject to ERISA if there are any employer contributions. This subjects you to non-discrimination testing, as well as other rules, limits and reporting requirements. I am not an authority in this area, and cannot help you with the details. If you are using a full-service 403(b) provider, you can probably get free help from them. Otherwise, you should probably find a good pension attorney, or work with a TPA.

School districts and most church organizations are not subject to ERISA, so they don't have so many strictures. The $40,000 limit (now $41,000, starting in 2004) is, in fact, rarely reached. Employers can make non-matching contributions, and school districts will sometimes do that under special circumstances for individual employees, which they can do because they are not subject to non-discrimination rules. Or, in hospital, university, or for-profit organizations (using 401(k) plans), some people may be highly enough compensated so that the safe harbor matching formula still puts them at the $41,000 limit.

My educated guess is that you are probably not going to get close to the $41,000 limit using a 403(b) plan. You may need to supplement it with another kind of plan. A 457 "Top Hat" plan may work well, especially if you are the only person who is supposed to be getting to the $41,000 limit. By their nature, these plans (which are quite different from the governmental 457 plans available in some public school districts) MUST be discriminatory.

But again, you really need to talk with a specialist about your situation.



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