403(b) plans are offered by certain non-profit organizations such as universities and 501(c)(3) charities.There’s an odd rule that side hustlers covered by a 403(b) plan should be aware of.
Section 415(k)(4) provides that the all additions limit (sometimes referred to as the 415(c) limit) is applied by aggregating 403(b) contributions with any contributions a side hustler makes to their own self-employment retirement plan such as a SEP IRA or Solo 401(k). Recall that the 2025 all additions limit is the lesser of 100% of compensation or $70,000 for those under age 50.
Section 415(k)(4) is an exception to the general rule that unrelated employers are not aggregated for the all additions limit. Since side hustlers are not usually aggregated with their employers for all additions limit purposes, they can have the ability to make very substantial contributions to a Solo 401(k) without worrying about the overall contributions made into their workplace retirement plans.
Note, of course, the annual deferral limit (the Section 402(g) limit, which is $23,500 for those under age 50 in 2025) is always coordinated with all of one’s employers since it is a per person limit, not a per employer limit.
History of Section 415(k)(4)
The odd rule of Section 415(k)(4) dates back to Section 632(b) of the Economic Growth and Tax Relief Reconciliation Act of 2001. It’s clear that back then Congress was tinkering with the contribution limits on all defined contribution retirement accounts. The 403(b) rules back then were complicated and EGTRRA revised them. In my review of the legislative history, I have not found a particular reason for the self-employment/403(b) all additions limit aggregation rule. Nevertheless, it is the law of the land.
Another part of Section 632, Section 632(a)(1), is what opened the door to Solo 401(k)s having significantly greater contribution limits than SEP IRAs. Section 632(a)(1) increased the Section 415(c) annual limit from 25% to 100% of compensation, which meant that Solo 401(k)s could, for the first time, offer both significant employee contributions and employer contributions.
Section 415(k)(4) Often Has No Effect
As a practical matter, Section 415(k)(4) will often have no effect, even on highly compensated professionals. Even with very generous employer contributions to the 403(b) for highly compensated professionals with a side hustle, the numbers won’t add up to the top of the Section 415(c) limit. Here’s an illustrative example:
Dr. Funke works at a university hospital making $260,000 in annual salary and has $120,000 of Schedule C side hustle income in 2025. Dr. Funke maxes out his 403(b) at $23,500 (employee contributions) and the hospital contributes 5% of salary ($13,000). Dr. Funke also maxes out a SEP IRA or Solo 401(k) employer contribution at $23,678 for his Schedule C side hustle. Those rather healthy numbers only get the total contributions to $60,178, well under the 2025 all additions limit of $70,000.
You can see that without any “after-tax” contributions, it will be quite rare that Section 415(k)(4) bites, especially considering that few employers offer a full 5 percent match.
Section 415(k)(4) and Notice 2014-54
To the extent Section 415(k)(4) creates a problem, it’s largely a problem of the IRS’s own benevolent creation with Notice 2014-54. Notice 2014-54 is what opened the flood gates by clearly allowing after-tax traditional contributions to retirement accounts to be immediately converted to Roth accounts without additional tax (the so-called Mega Backdoor Roth).
I’m not aware that many 403(b) plans offer after-tax contributions. Where the issue is more likely to come up is after-tax contributions to a Solo 401(k) as part of a Mega Backdoor Roth. Going back to Dr. Funke’s example, if he made after-tax contributions to a Solo 401(k) based on his $120,000 of Schedule C income, those combined with the other 403(b) and Solo 401(k) contributions could trip him over the combined $70,000 all additions limit.
I generally disfavor the Mega Backdoor Roth with the Solo 401(k) for two primary reasons.
First, most pre-approved Solo 401(k) plans do not offer after-tax contributions. I believe pre-approved plans tend to be the most desirable Solo 401(k) plans for most solopreneurs. Pre-approved plans tend to be the lowest cost plans (think Fidelity, Schwab, and Ascensus). They tend to offer low-cost, diversified index investments. Pre-approved plans also tend to have the lowest compliance risk. It’s difficult to have a prohibited transaction when the investment in the Solo 401(k) is one or more index funds. For most solopreneurs, avoiding pre-approved plans, the sacrifice required to do a Mega Backdoor Roth, is not worth it, in my opinion.
Second, the numbers often don’t work out when it comes to combining the Solo 401(k) with the Mega Backdoor Roth. This can be because the solopreneur doesn’t have enough cash flow to make the Mega Backdoor Roth a practical option. Or it could be because a solopreneur benefits from the high Solo 401(k) employee deferral and employer contribution limits to such an extent that the Mega Backdoor Roth does not add much value. That said, I do acknowledge that in Dr. Funke’s example, if his employer offered a 401(k) instead of a 403(b), the numbers work out to make the Mega Backdoor Roth in his a Solo 401(k) attractive from a tax standpoint.
Those with a 403(b) looking to “optimize” a Mega Backdoor Roth in a Solo 401(k) for a side hustle need to think twice and consider the impact of Section 415(k)(4).
Effect of Section 415(k)(4) Biting
The IRS and Treasury issued Treasury Regulation Section 1.415(g)-1(b)(3)(iv)(C)(2), which has an example illustrating how Section 415(k)(4) applies in an overcontribution situation. If the combined annual 403(b) contributions and SEP IRA/Solo 401(k) contributions exceed the aggregated all additions limit, the excess is deemed to have been made to the 403(b) plan, not to the SEP IRA or Solo 401(k).
The IRS places the onus on the 403(b) plan sponsor to enforce Section 415(k)(4). Employers should have communications in place with plan participants to make them aware of the effect contributions to self-employment retirement plans such as SEP IRAs and Solo 401(k)s can have on their 403(b).
Repeal List
If anyone in Congress is reading this, Section 415(k)(4) should be repealed. It’s a trap for the unwary that accomplishes next to nothing in furtherance of sound tax policy and revenue collection. If someone has a 401(k) their workplace 415(c) limit is not aggregated with their self-employment 415(c) limit. Why should people with 403(b)s instead of 401(k)s get worse treatment?
Let’s add Section 415(k)(4) repeal to Section 408A(d)(2)(B) repeal as easy wins for Congress to start simplifying the tax code at no significant cost to the fisc.
Conclusion
For those side hustlers covered by a 403(b) plan, it’s a good idea to ensure their total retirement plan contributions do not exceed the all additions limit. Unlike most side hustlers, those covered by a 403(b) plan only have one all additions limit shared between the 403(b) plan and their self-employment plan. The Mega Backdoor Roth is not very attractive for the Solo 401(k)s of side hustlers covered by a 403(b) because of the restrictions imposed by Section 415(k)(4).
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