After Tax 401K, 401a Limits

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Poltergiest
Posts: 5
Joined: Fri Jan 19, 2018 9:04 pm

After Tax 401K, 401a Limits

Post by Poltergiest » Fri Jan 19, 2018 9:33 pm

Hello all!

I've been browsing the forum for a few weeks, read the Bogle heads guide to investing and currently I am working on the guide to retirement. Today I finally joined the forum as I am having difficulty finding the answer to the question below. I'll give you some context first.

I am 36 years old and employed with two different companies. I recently started working at employer #2 part time and I am eligible to participate in the retirement plan they have. Currently I am maximizing my 401K with pre-tax dollars at employer #1 for a total of $18,500.00 this year. I'll not get an employer match at employer #1 (instead they give me 2% contribution to a SERP which is also tax deferred and vested at 5 years).

The plan at employer #2 allows pre-tax, Roth and after tax contributions. I do not get matching contributions at employer #2 either as I am part time. It is my understanding that given that I am already contributing the maximum at employer #1's 401K I cannot contribute to employer #2 pre tax or Roth options, however I can contribute after tax.

Assuming this to be the case my question pertains to how much I how much after tax contributions I can make? I am getting conflicting information from employer #2's benefit specialists, some tell me the full $55,000.00 while others tell me I have to take in consideration the 401K contributions at employer #1 which would mean a maximum contribution of $36,500.00 instead.

In order to avoid over or under contributing I hoped the hive mind of the Bogle heads cloud would be able to provide me with some clarity.

Employer #2 does not allow in service distributions so I cannot do yearly Mega Back Door Roths but if I work a few years with them it will probable be worth it. I am also exploring the option of doing in house roll overs/conversions from the after tax contributions to the 401K Roth at employer #2 as it apparently allowed twice a year but I have not done enough research on this. For instance would that affect how much I can contribute?

Thanks for taking the time to read my post and I appreciate your feedback. :D

Spirit Rider
Posts: 9168
Joined: Fri Mar 02, 2007 2:39 pm

Re: After Tax 401K, 401a Limits

Post by Spirit Rider » Sat Jan 20, 2018 1:08 am

  1. What does your inclusion of 401k and 401a in the title mean. Are the two plans both 401k plans or a 401k and a 401a plan? 401a pre-tax contributions are considered mandatory contributions and are not included in the employee deferral limit.
  2. There is a separate annual addition limit (2018 = $55K) for each unaffiliated employer. This is not a difficult question at all. Any employment benefit "specialist" who says otherwise is anything but a specialist. This is one of the two fundamental contribution limits that they should know by heart.
  3. If employer #2 allows employee after-tax contributions, offers no in-service rollovers of those contributions/earnings and allows In-Plan Roth Rollovers (IRR). You most definitely should do employee after-tax contributions and IRRs as frequently as possible.

SRenaeP
Posts: 774
Joined: Tue Jan 19, 2010 9:05 pm

Re: After Tax 401K, 401a Limits

Post by SRenaeP » Mon Jan 22, 2018 10:04 am

Spirit Rider wrote:
Sat Jan 20, 2018 1:08 am
  1. What does your inclusion of 401k and 401a in the title mean. Are the two plans both 401k plans or a 401k and a 401a plan? 401a pre-tax contributions are considered mandatory contributions and are not included in the employee deferral limit.
  2. There is a separate annual addition limit (2018 = $55K) for each unaffiliated employer. This is not a difficult question at all. Any employment benefit "specialist" who says otherwise is anything but a specialist. This is one of the two fundamental contribution limits that they should know by heart.
  3. If employer #2 allows employee after-tax contributions, offers no in-service rollovers of those contributions/earnings and allows In-Plan Roth Rollovers (IRR). You most definitely should do employee after-tax contributions and IRRs as frequently as possible.
Are you sure about item 2? From the IRS website, emphasis mine -

Remember that annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $55,000 for 2018 ($54,000 for 2017). In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $275,000 in 2018 ($270,000 in 2017).

https://www.irs.gov/retirement-plans/pl ... ion-limits

-Steph

ERISA Stone
Posts: 1490
Joined: Tue Jun 24, 2014 8:54 am

Re: After Tax 401K, 401a Limits

Post by ERISA Stone » Mon Jan 22, 2018 10:54 am

SRenaeP wrote:
Mon Jan 22, 2018 10:04 am
Spirit Rider wrote:
Sat Jan 20, 2018 1:08 am
  1. What does your inclusion of 401k and 401a in the title mean. Are the two plans both 401k plans or a 401k and a 401a plan? 401a pre-tax contributions are considered mandatory contributions and are not included in the employee deferral limit.
  2. There is a separate annual addition limit (2018 = $55K) for each unaffiliated employer. This is not a difficult question at all. Any employment benefit "specialist" who says otherwise is anything but a specialist. This is one of the two fundamental contribution limits that they should know by heart.
  3. If employer #2 allows employee after-tax contributions, offers no in-service rollovers of those contributions/earnings and allows In-Plan Roth Rollovers (IRR). You most definitely should do employee after-tax contributions and IRRs as frequently as possible.
Are you sure about item 2? From the IRS website, emphasis mine -

Remember that annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $55,000 for 2018 ($54,000 for 2017). In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $275,000 in 2018 ($270,000 in 2017).

https://www.irs.gov/retirement-plans/pl ... ion-limits

-Steph
Your emphasis ended a few words too early. :happy
Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer

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Earl Lemongrab
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Re: After Tax 401K, 401a Limits

Post by Earl Lemongrab » Mon Jan 22, 2018 11:02 am

Just read through example 1 in the linked publication:
Example 1: Greg, 46, is employed by an employer with a 401(k) plan, and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2017, $18,000. Greg would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $18,000. He has enough earned income from his business to contribute the overall maximum for the year, $54,000. Greg can make a nonelective contribution of $54,000 to his solo 401(k) plan. This $54,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

SRenaeP
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Joined: Tue Jan 19, 2010 9:05 pm

Re: After Tax 401K, 401a Limits

Post by SRenaeP » Mon Jan 22, 2018 1:37 pm

Earl Lemongrab wrote:
Mon Jan 22, 2018 11:02 am
Just read through example 1 in the linked publication:
Example 1: Greg, 46, is employed by an employer with a 401(k) plan, and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2017, $18,000. Greg would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $18,000. He has enough earned income from his business to contribute the overall maximum for the year, $54,000. Greg can make a nonelective contribution of $54,000 to his solo 401(k) plan. This $54,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately.
I interpreted that as applying to SIMPLE and/or solo 401k plans. Neither of the examples illustrated two separate employer-sponsored 401k plans.

However, after further reading, I stand corrected.

-Steph

seawolf21
Posts: 259
Joined: Tue Aug 05, 2014 7:33 am

Re: After Tax 401K, 401a Limits

Post by seawolf21 » Mon Jan 22, 2018 3:06 pm

If working for two unaffiliated employers, the TOTAL elective deferrals limit for the 2018 is $18,500 PER TAXPAYER. Elective deferrals is pre-tax 401(k), Roth 401(k) and/or any combination thereof.

415 limit is $55,000 PER PLAN. 415 includes all employee and employer contributions (and forfeitures) AKA annual additions.

Going back to OP's scenario:
  • If the plan is to continue to contribute $18,500 pre-tax at employer# 1, NO pre-tax/Roth contributions would be allowed at employer# 2
  • As employer# 2 does not match, you can payroll deduct up to $55,000 as after-tax at employer# 2 401(k). Whether you can hit this limit depends on your salary there and the amount they allow you to deduct per paycheck towards 401(k) contribution.
  • If employer# 1 were to allow for after tax, then you can payroll deduct $36,500 after tax in addition to the $18,500 pre-tax. Also subject to salary and amount allowed to be deducted per paycheck. Assumption is employer 2% match does not go into this 401(k). If it does, then the $36,500 wold be reduced to ensure the sum of annual additions do not exceed $55,000.

Dottie57
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Joined: Thu May 19, 2016 5:43 pm

Re: After Tax 401K, 401a Limits

Post by Dottie57 » Mon Jan 22, 2018 3:25 pm

SRenaeP wrote:
Mon Jan 22, 2018 10:04 am
Spirit Rider wrote:
Sat Jan 20, 2018 1:08 am
  1. What does your inclusion of 401k and 401a in the title mean. Are the two plans both 401k plans or a 401k and a 401a plan? 401a pre-tax contributions are considered mandatory contributions and are not included in the employee deferral limit.
  2. There is a separate annual addition limit (2018 = $55K) for each unaffiliated employer. This is not a difficult question at all. Any employment benefit "specialist" who says otherwise is anything but a specialist. This is one of the two fundamental contribution limits that they should know by heart.
  3. If employer #2 allows employee after-tax contributions, offers no in-service rollovers of those contributions/earnings and allows In-Plan Roth Rollovers (IRR). You most definitely should do employee after-tax contributions and IRRs as frequently as possible.
Are you sure about item 2? From the IRS website, emphasis mine -

Remember that annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $55,000 for 2018 ($54,000 for 2017). In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $275,000 in 2018 ($270,000 in 2017).

https://www.irs.gov/retirement-plans/pl ... ion-limits

-Steph
I think you are right Steph. 55k is the total max.

Spirit Rider
Posts: 9168
Joined: Fri Mar 02, 2007 2:39 pm

Re: After Tax 401K, 401a Limits

Post by Spirit Rider » Mon Jan 22, 2018 3:44 pm

Dottie57 wrote:
Mon Jan 22, 2018 3:25 pm
SRenaeP wrote:
Mon Jan 22, 2018 10:04 am
Are you sure about item 2? From the IRS website, emphasis mine -

Remember that annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $55,000 for 2018 ($54,000 for 2017). In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $275,000 in 2018 ($270,000 in 2017).

https://www.irs.gov/retirement-plans/pl ... ion-limits
I think you are right Steph. 55k is the total max.
No SRenaeP and you are not right. Did you not read the bolded quotes from the IRS in ERISA Stone's and Earl Lemongrab's posts.

You are taking factual statements that only apply to a single employer or group of affiliated employers' plans and extrapolating this out of context.

Not to mention SRenaeP's link above couldn't be any clearer in the section that applies to annual additions.

Overall limit on contributions
Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited.

Poltergiest
Posts: 5
Joined: Fri Jan 19, 2018 9:04 pm

Re: After Tax 401K, 401a Limits

Post by Poltergiest » Mon Jan 22, 2018 8:46 pm

seawolf21 wrote:
Mon Jan 22, 2018 3:06 pm
If working for two unaffiliated employers, the TOTAL elective deferrals limit for the 2018 is $18,500 PER TAXPAYER. Elective deferrals is pre-tax 401(k), Roth 401(k) and/or any combination thereof.

415 limit is $55,000 PER PLAN. 415 includes all employee and employer contributions (and forfeitures) AKA annual additions.

Going back to OP's scenario:
  • If the plan is to continue to contribute $18,500 pre-tax at employer# 1, NO pre-tax/Roth contributions would be allowed at employer# 2
  • As employer# 2 does not match, you can payroll deduct up to $55,000 as after-tax at employer# 2 401(k). Whether you can hit this limit depends on your salary there and the amount they allow you to deduct per paycheck towards 401(k) contribution.
  • If employer# 1 were to allow for after tax, then you can payroll deduct $36,500 after tax in addition to the $18,500 pre-tax. Also subject to salary and amount allowed to be deducted per paycheck. Assumption is employer 2% match does not go into this 401(k). If it does, then the $36,500 wold be reduced to ensure the sum of annual additions do not exceed $55,000.
Based on all the answers I hope you can see why I was confused about just want I can do. I agree that the benefit specialists at employer #2 should know better about the plan that they operate. I plan on contributing to employer #2 with $55,000.00 in after dollars and doing an in plan roll overs to the 401K Roth that is offered there. Unfortunately employer #1 only offers the tradition pre-tax 401K as I probably would have maxed that out too with after tax dollars. :beer

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: After Tax 401K, 401a Limits

Post by Spirit Rider » Mon Jan 22, 2018 9:51 pm

Poltergiest: You did not answer my question of the inclusion of 401a in the title.

Are plans #1 and #2 both 401k plans or is one of them a 401a plan?

It is very important.

seawolf21
Posts: 259
Joined: Tue Aug 05, 2014 7:33 am

Re: After Tax 401K, 401a Limits

Post by seawolf21 » Mon Jan 22, 2018 10:37 pm

Poltergiest wrote:
Mon Jan 22, 2018 8:46 pm
seawolf21 wrote:
Mon Jan 22, 2018 3:06 pm
If working for two unaffiliated employers, the TOTAL elective deferrals limit for the 2018 is $18,500 PER TAXPAYER. Elective deferrals is pre-tax 401(k), Roth 401(k) and/or any combination thereof.

415 limit is $55,000 PER PLAN. 415 includes all employee and employer contributions (and forfeitures) AKA annual additions.

Going back to OP's scenario:
  • If the plan is to continue to contribute $18,500 pre-tax at employer# 1, NO pre-tax/Roth contributions would be allowed at employer# 2
  • As employer# 2 does not match, you can payroll deduct up to $55,000 as after-tax at employer# 2 401(k). Whether you can hit this limit depends on your salary there and the amount they allow you to deduct per paycheck towards 401(k) contribution.
  • If employer# 1 were to allow for after tax, then you can payroll deduct $36,500 after tax in addition to the $18,500 pre-tax. Also subject to salary and amount allowed to be deducted per paycheck. Assumption is employer 2% match does not go into this 401(k). If it does, then the $36,500 wold be reduced to ensure the sum of annual additions do not exceed $55,000.
Based on all the answers I hope you can see why I was confused about just want I can do. I agree that the benefit specialists at employer #2 should know better about the plan that they operate. I plan on contributing to employer #2 with $55,000.00 in after dollars and doing an in plan roll overs to the 401K Roth that is offered there. Unfortunately employer #1 only offers the tradition pre-tax 401K as I probably would have maxed that out too with after tax dollars. :beer
Are you eligible for MEGA backdoor Roth? It may be better than an in-plan Roth conversion in terms of access to funds prior to 59.5 years of age.

Poltergiest
Posts: 5
Joined: Fri Jan 19, 2018 9:04 pm

Re: After Tax 401K, 401a Limits

Post by Poltergiest » Wed Jan 24, 2018 1:03 pm

Spirit Rider wrote:
Mon Jan 22, 2018 9:51 pm
Poltergiest: You did not answer my question of the inclusion of 401a in the title.

Are plans #1 and #2 both 401k plans or is one of them a 401a plan?

It is very important.
I am still trying to confirm for sure. Employer #1 is 401K, and Employer #2 is 401a is my current understanding. Employer contributions at employer #2 (which I am not eligible for) guess technically to a 403b.

At any rate do explain the importance for the difference. Thanks.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: After Tax 401K, 401a Limits

Post by Spirit Rider » Wed Jan 24, 2018 1:38 pm

Employee pre-tax contributions to a 401a are considered mandatory employer salary reductions if picked up by the employer which they almost always are. They are not considered elective employee deferrals and are not subject to the employee deferral limit. This means you can make whatever employee pre-tax contributions to the 401a plan at employer #2 in addition to the full employee deferral limit at employer #1.

Note: There is usually a one-time restrictive selection period at employment for 401a pre-tax employee contributions to be considered mandatory contributions. This was the reason for the importance. Even if you already chose to maximize the $55K as employee after-tax contributions. You generally would be able to select pre-tax contributions is lieu of some of the employee after-tax contributions if still during the selection period.

I was making the assumption that you will have one of the higher marginal tax rates and pre-tax contributions would be preferable to after-tax contributions. And that you were making the full $55K as employee after-tax contributions, because you thought that was the only option available to you.

Poltergiest
Posts: 5
Joined: Fri Jan 19, 2018 9:04 pm

Re: After Tax 401K, 401a Limits

Post by Poltergiest » Thu Jan 25, 2018 4:57 pm

Spirit Rider wrote:
Wed Jan 24, 2018 1:38 pm
Employee pre-tax contributions to a 401a are considered mandatory employer salary reductions if picked up by the employer which they almost always are. They are not considered elective employee deferrals and are not subject to the employee deferral limit. This means you can make whatever employee pre-tax contributions to the 401a plan at employer #2 in addition to the full employee deferral limit at employer #1.

Note: There is usually a one-time restrictive selection period at employment for 401a pre-tax employee contributions to be considered mandatory contributions. This was the reason for the importance. Even if you already chose to maximize the $55K as employee after-tax contributions. You generally would be able to select pre-tax contributions is lieu of some of the employee after-tax contributions if still during the selection period.

I was making the assumption that you will have one of the higher marginal tax rates and pre-tax contributions would be preferable to after-tax contributions. And that you were making the full $55K as employee after-tax contributions, because you thought that was the only option available to you.
Ah I see. Well I called the human resources folks at employer #2, yet again, and when asked if the savings plan was a 401a vs a 401K they really couldn't give me a straight answer saying only employer contributions go to the 401a whereas everything else goes into a 403b. At any rate they confirmed that my deferrals at employer #1 would affect my ability to contribute to the pre-tax or roth options at employer #2 so I will be only contributing to the after tax portion. Thanks for the info. I am pretty sure in plan after tax to Roth conversions are OK but I will be doing more research on that.

Poltergiest
Posts: 5
Joined: Fri Jan 19, 2018 9:04 pm

Re: After Tax 401K, 401a Limits

Post by Poltergiest » Sat Jan 27, 2018 9:56 pm

seawolf21 wrote:
Mon Jan 22, 2018 10:37 pm
Poltergiest wrote:
Mon Jan 22, 2018 8:46 pm
seawolf21 wrote:
Mon Jan 22, 2018 3:06 pm
If working for two unaffiliated employers, the TOTAL elective deferrals limit for the 2018 is $18,500 PER TAXPAYER. Elective deferrals is pre-tax 401(k), Roth 401(k) and/or any combination thereof.

415 limit is $55,000 PER PLAN. 415 includes all employee and employer contributions (and forfeitures) AKA annual additions.

Going back to OP's scenario:
  • If the plan is to continue to contribute $18,500 pre-tax at employer# 1, NO pre-tax/Roth contributions would be allowed at employer# 2
  • As employer# 2 does not match, you can payroll deduct up to $55,000 as after-tax at employer# 2 401(k). Whether you can hit this limit depends on your salary there and the amount they allow you to deduct per paycheck towards 401(k) contribution.
  • If employer# 1 were to allow for after tax, then you can payroll deduct $36,500 after tax in addition to the $18,500 pre-tax. Also subject to salary and amount allowed to be deducted per paycheck. Assumption is employer 2% match does not go into this 401(k). If it does, then the $36,500 wold be reduced to ensure the sum of annual additions do not exceed $55,000.
Based on all the answers I hope you can see why I was confused about just want I can do. I agree that the benefit specialists at employer #2 should know better about the plan that they operate. I plan on contributing to employer #2 with $55,000.00 in after dollars and doing an in plan roll overs to the 401K Roth that is offered there. Unfortunately employer #1 only offers the tradition pre-tax 401K as I probably would have maxed that out too with after tax dollars. :beer
Are you eligible for MEGA backdoor Roth? It may be better than an in-plan Roth conversion in terms of access to funds prior to 59.5 years of age.

The plan at employer #2 does not allow in service distributions and I do not know how long I plan on working there so I guess this means I am currently not eligible for the Mega Back Door Roth.

However if I do the in plan Roth conversions to the 401K Roth from the after tax contributions can't I then roll over from the 401K Roth to my Roth IRA when I ultimately leave? I checked the IRS roll over chart and it seems so. Won't this have the same effect of the Mega Back Door Roth with out having the issue of paying taxes on gains?

I did some reading and apparently the in house Roth conversions are allowed. I think I am limited to two conversions a year by the plan. https://www.irs.gov/retirement-plans/de ... h-accounts

alarkotgyada
Posts: 1
Joined: Fri Aug 03, 2018 12:04 pm

Re: After Tax 401K, 401a Limits

Post by alarkotgyada » Fri Aug 03, 2018 12:11 pm

Folks, I am in a similar situation. In my previous job I maxed my limit of 54k.
Now I am looking to be able to save some more after-tax in the new company.
The plan manager here says the 54K limi is per-person, not per-company.
The same thing was told by the Fidelity advisor - she claimed she's been in this business for years and she's "pretty" sure the limit is per-person.
I showed the IRS page cited here to both of them and the example "Greg, 46" example, both shrugged and said it does not apply to me (it's SEP, not a regular through-employer plan). I could not convince them otherwise.
When I pressed further, the fidelity financial advisor 'advised' me to talk to IRS directly and/or a tax advisor.
Does that make sense?
I am meeting a TAX advisor today, but would love to hear more opinions on what would you folks do.

Spirit Rider
Posts: 9168
Joined: Fri Mar 02, 2007 2:39 pm

Re: After Tax 401K, 401a Limits

Post by Spirit Rider » Fri Aug 03, 2018 8:17 pm

alarkotgyada wrote:
Fri Aug 03, 2018 12:11 pm
Folks, I am in a similar situation. In my previous job I maxed my limit of 54k.
Now I am looking to be able to save some more after-tax in the new company.
The plan manager here says the 54K limi is per-person, not per-company.
The same thing was told by the Fidelity advisor - she claimed she's been in this business for years and she's "pretty" sure the limit is per-person.
I showed the IRS page cited here to both of them and the example "Greg, 46" example, both shrugged and said it does not apply to me (it's SEP, not a regular through-employer plan). I could not convince them otherwise.
When I pressed further, the fidelity financial advisor 'advised' me to talk to IRS directly and/or a tax advisor.
Does that make sense?
I am meeting a TAX advisor today, but would love to hear more opinions on what would you folks do.
The annual addition limit (2018 = $55K) is per unaffiliated employer. The fact that one is a SEP is irrelevant. The annual addition limit applies to all defined contribution (DC) qualified plans 401a, 401k, 403b, SEP, SARSEP and SIMPLE IRAs. It does not apply to 457b plans.

However, 403b plans are considered controlled by the participant. Prior to 2018, 403b plans of different employers had to be aggregated together. 403b plans must still be aggregated with any plans where the 403b participant is a > 50% owner.

So unless this was a 403b plan, the plan manager and no matter how many years the Fidelity advisor has been in the business are incompetent. If they still maintained this position after you provided the IRS reference. They should find a new career since they don't even have half a clue.

There is no reason to "talk to the IRS directly" (not that I am convinced you could find a phone rep who would know this issue) or a tax advisor. This is absolutely clear cut and not even remotely open for dispute. I sure hope this Fidelity "advisor" is not someone you are paying to steal your money.

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