4053 / What is an excess contribution and an excess aggregate contribution to a tax sheltered annuity? What excise taxes apply to them?

There are several different limitations applicable to amounts contributed to 403(b) annuities. Contributions that exceed any of these particular limits may be thought of as excess contributions, but they are treated differently depending on the limit that is exceeded and, sometimes, depending on whether the excess amount is contributed to a custodial account or toward the purchase of an annuity contract.

When contributions that exceed the lesser of the excludable amount or the overall limit are made to a custodial account for the purchase of regulated investment company stock or a retirement income account to the extent funded through custodial accounts, they are properly called excess contributions and are subject to an excise tax.¹ The tax is 6 percent (not to exceed 6 percent of the value of the account) of the following: (1) the amount by which the contributions, other than a permissible rollover contribution ( Q 4007), exceed the lesser of the amount excludable from gross income under IRC Section 403(b) or the overall limitation under IRC Section 415, or whichever is applicable if only one is applicable, plus (2) any excess carried over from the preceding tax year. An excess carried over from a previous year may be reduced by contributing in a year less than the excludable amount or the contribution limit, whichever is lower. An excess also may be reduced by taxable distributions.² The tax is imposed on the employee.

If contributions are made toward the purchase of an annuity contract, the excess is not subject to an excise tax.

For contributions in excess of the overall limit of IRC Section 415, see Q 4046.

Where salary reduction contributions are in excess of the limit on elective deferrals, the amount above the limit is not excludable from income when contributed and, if not timely distributed, is included in gross income for a second time when later distributed ( Q 4047, Q 4042).

Discriminatory Matching Employer Contributions. If an employer makes certain discriminatory matching contributions toward an annuity contract or to a custodial account, amounts in excess of nondiscriminatory amounts are called excess aggregate contributions and are subject to a 10 percent excise tax if not timely distributed ( Q 3808).³