Advanced Underwriting Consultants

Ask the Experts – March 12

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have a client who participates in both his employer-sponsored 403(b) annuity and a simplified employee pension (SEP) for his own side-business. Can he make the full contribution limits for both, or are there restrictions?

Answer: His SEP contribution limit could be reduced by the amount he contributes to his 403(b) account.

In 2014, the limit on elective deferrals is $17,500 for 403(b) annuities. This limitation is per individual—not per plan. The contribution limit for any pension or profit-sharing plan maintained by the same employer is $52,000. SEP plans are slightly different, where the contribution limit is the lesser of $52,000 or 25 percent of the individual’s income.

An employee can generally contribute the full $17,500 in elective deferrals to one employer’s plan, and also make the maximum $52,000 contribution to another employer’s pension or profit-sharing plan. However, Section 415(k)(4) provides for a special rule between 403(b) annuities and SEP plans that essentially treats both plans as maintained by the same employer for purposes of the contribution limits.

Therefore, the $52,000 SEP limit would be reduced by the amount the participant contributes to his 403(b) annuity. If he contributes the maximum $17,500 elective deferrals to the 403(b) annuity, the $52,000 limit decreases to $34,500. In other words, he can now only contribute the lesser of $34,500 or 25 percent of his income.

This reduction from $52,000 to $34,500 will only affect an individual who earns more than $138,000 in his self-employed business because if his self-employment income is $138,000 or less, such contributions would be limited to 25 percent of his income (i.e. $34,500 is 25 percent of $138,000)—in other words, the $34,500 limit is irrelevant for such individuals. If he earns more than $138,000, he’s limited to $34,500 instead of $52,000.

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