In addition to making basic elective deferrals, your 403(b) plan may also permit employees to make two different types of catch-up elective deferral contributions: Age 50 Catch-Up and 15 Years of Service Catch-Up contributions.
Age 50 catch-up contributions are generally available to employees who are age 50 or older by the end of the tax year. Subject to certain limitations, 15 years of service catch-up contributions are generally available to employees who:
- did not make the maximum amount of elective deferrals in previous years, and
- have accumulated 15 years of service with the same employer.
For the purpose of 15 years of service catch-up contributions, “employer” refers to a school, hospital, home health service agency, welfare service agency, church or a similar organization.
403(b) plan sponsors often make errors in determining whether an employee is eligible for one or both types of catch-up contributions, and in determining the amount of catch-up contributions that an employee may make. For example, an employee’s 15 years of service allowable catch-up contribution may be limited if an employee is eligible to make both types of catch-up contributions. This is because elective deferrals in excess of the basic contribution level must first be allocated to 15 years of service contributions before being allocated to age 50 catch-up contributions.
Of course, as the plan sponsor, you have the option of deciding whether or not to make catch-up contributions available under your plan in the first place. If made available, be sure to adhere to the methodology described above and properly limit contributions made under the 15-year rule.
If your plan permits catch-up contributions, your MetLife Financial Services Representatives can help your employees determine their eligibility. Using proprietary laptop software and information provided by the employee, our representatives can calculate the extent to which he or she may contribute to your plan in excess of the basic elective deferral limit. Maximizing participation in the plan can help employees achieve their retirement savings goals.
A 403(b) plan may permit employees to receive a hardship distribution as long as the distribution is necessary to satisfy an immediate and heavy financial need. If you choose to allow hardship distributions under your plan, the plan must clearly state that participant hardships are available (subject to the provisions of the participant’s insurance or custodial account contract).
The IRS has provided “Safe Harbor” rules applicable to a hardship distribution of elective deferrals while still employed. To meet the Safe Harbor requirements, the hardship distribution must meet both “financial need” and “deemed necessary” rules.
- Under the Safe Harbor “financial need” rules, a distribution may be made to:
- Pay uninsured medical and/or hospital expenses for the employee and the employee’s spouse and dependents;
- Pay costs directly related to the purchase of an employee’s primary residence;
- Prevent eviction from, or foreclosure on the mortgage on, an employee’s primary residence;
- Pay upcoming, post-secondary educational expenses of an employee and the employee’s spouse, children and dependents;
- Pay funeral expenses for an employee’s deceased parent, spouse, child or dependent; and
- Pay for the repair of, or damage to, the employee’s principal residence that qualifies for the casualty deduction.
Under the Safe Harbor “deemed necessary” rules, it is your responsibility as the plan sponsor to confirm that the employee has obtained all other currently available distributions and nontaxable loans under the plan, and all other plans that are maintained by you. In addition, the employee must not be permitted to make elective deferrals to any plan maintained by you for at least six months after receipt of the hardship distribution.
Hardship distributions cannot be rolled over to another plan or to an IRA. They are generally subject to the 10% early distribution penalty on distributions made prior to the employee reaching age 59½.
Generally, you may permit employee loans as an optional 403(b) plan feature. If so, your written plan must specifically allow loans, and the loan provision should be based on a detailed, written loan program.
A 403(b) plan loan is not taxable to the employee as long as the loan satisfies the following guidelines:
- The loan must be made as part of a written loan program maintained by the plan sponsor.
- An employee may generally borrow the lesser of 50% of their vested account balance, or $50,000.
- The loan must be repaid within a period of no more than five years, unless the loan is used to purchase the employee’s primary residence.
- Loan repayments must be made in substantially level payments, at least quarterly, over the life of the loan.
The $50,000 maximum loan amount must be reduced if the employee has an outstanding loan under the plan (or any other plan of the plan sponsor or related employer) during the one-year period ending the day before the new loan. The amount of the reduction is the employee’s highest outstanding loan balance during that period minus the outstanding balance on the date of the new loan.
Certain 403(b) plan sponsors – such as K-12 school districts – may be able to increase the retirement savings opportunities for employees by making available a 457(b) Plan or a Final Pay Plan, or allowing Roth 403(b) or 457(b) plan contributions. Adding these optional plan features can enhance your overall employee benefits offering, increase your employees’ opportunity to save for retirement and help you attract and retain top talent.
It’s important to remember, however, that your existing plan document has to reflect these additional plans and may have to be amended in order to do so. Speak to your MetLife Representative for more details.
* The 403(b) plan sponsor must send elective deferrals to the vendor within a period that is not longer than is reasonable for the proper administration of the plan (generally, within 15 business days following the month in which these amounts would have been paid to an employee). However, a 403(b) plan subject to the Employee Retirement Security Income Act of 1974 (ERISA), as amended, is generally required to transfer salary deferral contributions to the vendor as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets, but no longer than 15 business days following the month in which the amounts would otherwise have been paid to the participant. The "reasonably be segregated" requirement has been interpreted to mean a period significantly shorter than the 15 business day standard. Small ERISA plans may qualify for a safe harbor if contributions are made within a seven business days following the day on which such amount would otherwise have been payable to the participant in cash.