For tax years beginning after 2001, the maximum exclusion allowance (MEA) has been repealed.

Generally, your MAC for 2002 is the lesser of:

• The limit on annual additions, or
• The limit on elective deferrals.

Depending on the type of contributions made to your 403(b) account in 2002, only one of the limits may apply to you.

Elective deferrals only. If in 2002, all of the contributions made to your 403(b) account are elective deferrals, you will need to figure both the limit on annual additions and the limit on elective deferrals. Your MAC is the lesser of the two limits.

Nonelective contributions. If in 2002, all of the contributions made to your 403(b) account are nonelective contributions, you will need to figure only your limit on annual additions.

Elective deferrals and nonelective deferrals. If in 2002, the contributions made to your 403(b) account are a combination of both elective deferrals and nonelective contributions, you will need to figure both the limit on elective deferrals and the limit on annual additions. Your MAC is your limit on annual additions.

However, you will need to figure your limit on elective deferrals to determine whether the amount contributed to your 403(b) account is more than your allowable limit.

Limit on Annual Additions

The first component of MAC for 2002 is the limit on annual additions. This is a limit on the total contributions that can be made to your account each year. Before 2002, you could have figured your limit on annual additions using either the general rule or one of three alternative limits on annual additions.

However, for years beginning after 2001, you cannot use the any year limit, the year of separation from service limit, or the overall limit to figure your limit on annual additions. You can only use the general rule.

Under the general rule for 2002, your limit on annual additions is the lesser of:

• $40,000, or
• 100% of includible compensation for your most recent year of service.

More than one 403(b) account. If you contributed to more than one 403(b) account you must combine the contributions made to all 403(b) accounts on your behalf by your employer.

Participation in a qualified plan. If you participated in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pensions of all corporations, partnerships, and sole proprietorships in which you have more than 50% control.

Note. In previous years, your compensation for your limitation year was used to figure your limit on annual additions. However, beginning in 2002, you will use includible compensation for your most recent year of service to figure your limit on annual additions.

Includible Compensation for Your Most Recent Year of Service

Note. If you are a foreign missionary or a church employee, see Ministers and Church Employees, later, for information on your includible compensation.

Includible compensation for your most recent year of service is a combination of the amount of income and benefits you receive from the employer who contributes to your 403(b) account that you must include in your income for your last full year of service ending no later than the last day of your tax year.

Your includible compensation does not include any amount received from a former employer after the fifth year following the year in which your employment is terminated.

To figure includible compensation for your most recent year of service, you will need to identify:

• Your most recent year of service, and
• Your compensation associated with your most recent year of service.

Chapter 3 instructs you on how to figure your includible compensation for your most recent year of service.

You can use Worksheet C in chapter 13 to determine your includible compensation for your most recent year of service.

Limit on Elective Deferrals

The limit on elective deferrals is a limit on the amount of contributions that can be made to your account through a salary reduction agreement (defined in chapter 5). Generally, the rules for your limit on elective deferrals are the same for 2002 as they were for 2001. The rules for 2001 are explained in chapter 5.

Under the general limit on elective deferrals the most that can be contributed to your 403(b) account through a salary reduction agreement for 2002 is $11,000. This limit applies without regard to community property laws. If you qualify for the 15-year rule, your limit on elective deferrals for 2002 can be as high as $14,000. Both the general limit and the 15-year rule are explained in chapter 5.

Example

In 2001, Jerry's MAC was $9,450. He now needs to determine his MAC for 2002. Jerry expects to be a full-time employee for all of 2002. Jerry projects that his includible wages (box 1 of Form W-2) will be $39,000 in 2002. He has decided to have 10% of his salary contributed to his 403(b) account through payroll reductions. Jerry also has decided to have all contributions invested in mutual funds.

Jerry's employer does not contribute funds to a cafeteria plan or 457 account on his behalf. His employer does give him a monthly transportation subsidy of $65. The subsidy began January 2002.

Figuring Jerry's includible compensation. To determine his MAC, Jerry must first figure his limit on annual additions. The first thing Jerry needs to determine before figuring his limit on annual additions is his includible compensation for his most recent year of service. Jerry's includible compensation is $43,680.00, as shown on Table 9-1.

Figuring Jerry's limit on annual additions. Using his includible compensation for his most recent year of service, Jerry figures his limit on annual addition. His limit on annual additions for 2002, is $40,000, as shown on Table 9-2.

Figuring Jerry's limit on elective deferrals. The last component needed before he can determine his MAC for 2002 is his limit on elective deferrals.

Jerry has been employed with his current employer for less than 15 years. He is not eligible for the special 15-year increase. Therefore, his limit on elective deferrals is $11,000, as shown in Table 9-3.

Figuring Jerry's MAC for 2002. Jerry has determined his limit on annual additions to be $40,000 and his limit on elective deferrals to be $11,000. His MAC for 2002 is the lesser of the two. Since only elective deferrals were contributed to Jerry's 403(b) account. Jerry's MAC for 2002 is $11,000.

Jerry's MAC can be figured using Worksheet 7, Maximum Amount Contributable (MAC) for 2002, as shown in Table 9-4.

Tables 9-1, 9-2, 9-3, for Jerry's 2002 MAC

Table 9-4 Jerry's MAC for 2002

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