Amounts Previously Excludable

To figure your MEA for 2001, you must know the amounts previously excludable from your income.

Table 3-5. Worksheet C. Includible Compensation for your Most recent year of service

Amounts previously excludable are the total of all contributions for retirement benefits made for you by your employer that you excluded from your gross income in prior years. Amounts previously excludable do not include amounts excluded for 2001.

Amounts previously excludable include contributions in earlier years by your employer to:

• Your 403(b) account,
• A qualified annuity plan or a qualified pension, profit-sharing plan, or stock bonus trust,
• A qualified bond-purchase plan,
• A retirement plan under which the contributions originally were excludable by you only because your rights to the contributions were forfeitable when made, and which also were excludable by you when your rights became nonforfeitable. (This does not apply to contributions to purchase an annuity contract if your employer was an exempt organization when the contributions were made.),
• An eligible section 457 deferred compensation plan, even if maintained by a separate employer, or
• Excess contributions made to your 403(b) account that are more than your limit on annual additions.

For 2001, contributions to a defined benefit plan do not have to be treated as amounts previously excludable. Your employer can tell you if any contributions were made on your behalf to a defined benefit plan.

Figuring MEA for 2001

You need to figure MEA separately for each employer who contributed to a 403(b) account for your benefit. When figuring your MEA, do not include amounts contributed, compensation, or years of service for one employer with those for another employer. Special rules apply to church employees, as explained in chapter 7.

The following example shows how to figure MEA. The facts presented in this example will also be used in examples in chapters 4 and 5.

Example

Jerry has been working full time for a local hospital since the beginning of July 1997. Except for 1997, when he worked for one half of the hospital's annual work period, Jerry has worked for the hospital's entire annual work period. Jerry's includible wages (box 1 of Form W-2) from the hospital are shown in the following chart.

1997		$16,000
1998		32,000
1999		32,000
2000		35,000
2001		35,000

Jerry's employer has set up a 403(b) account for him. In this account, Jerry has chosen to invest 8% of his salary each year in mutual funds through payroll reductions. For 2001, this is $2,800. Jerry is not using an alternative limit on annual additions.

Figure Jerry's years of service.   The first thing Jerry will need to do is figure his years of service. In 1997, Jerry worked ½ of the year for his employer. For the years 1998 through 2001, Jerry has been a full-time employee for each of the hospital's entire annual work periods.

Jerry's years of service at the end of 2001 total 4.5 years.

Figure Jerry's includible compensation.   The second thing for Jerry to figure is his includible compensation for his most recent year of service. Before he can do this, he must identify his most recent year of service. Jerry is a full-time employee who works the entire annual work period. Jerry's most recent year of service is 2001. Jerry figures his includible compensation as shown in Table 3-6.

Figure Jerry's amounts previously excludable.   Jerry's next step is to figure his amounts previously excludable. The 8% contributions made through a salary reduction agreement equal $9,200.

Jerry's MEA.   Using the figures for years of service, includible compensation, and amounts previously excludable, Jerry can now use Worksheet A to figure his MEA as shown in Table 3-7.

Figuring Jerry's MAC

Jerry's MEA for 2001 is $24,820. However, this is not the maximum amount that can be contributed to his 403(b) account. To determine his MAC, Jerry will need to figure his limit on annual additions (chapter 4) and his limit on elective deferrals (chapter 5).

Table 3.6 and Table 3.7 Table for Includible compensation and Maximum exclusion allowance

Limit on Annual Additions for 2001

This chapter applies only to contributions made in 2001. For the rules on figuring the limit on annual additions for 2002, see chapter 9.

The second component of MAC for 2001 is the limit on annual additions. This is a limit on the total contributions (elective deferrals, nonelective deferrals, and after-tax contributions) that could have been made to your account for 2001. You can figure the limit on annual additions using either of the following.

• The general rule, or
• An alternative limit.

This chapter will discuss figuring the limit on annual additions using the general rule. For information on the alternative limits, see chapter 6.

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

• $35,000, or
• 25% of your compensation for your limitation year.

Generally, your limitation year is the calendar year. However, you can elect to change your limitation year to any consecutive 12-month period. To do this, attach a statement to your individual income tax return for the year you make the change.

You can use Worksheet D in chapter 13 to figure your limit on annual additions under the general rule.

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.

Table 4–1 Jerry's Compensation worksheet

Figuring the Limit on Annual Additions

To figure the limit on annual additions under the general rule, you will need to determine what is and is not compensation. Generally, compensation includes:

• Wages, salaries, and fees for personal services with the employer maintaining the plan, even if excludable as foreign earned income,
• Certain taxable accident and health insurance payments,
• Moving expense payments or reimbursements paid by your employer, if such payments are not deductible by you,
• The value of nonqualified stock options granted to you that are includible in your gross income in the year granted,
• Elective deferrals,
• Amounts contributed or deferred (at your election) by your employer under a cafeteria plan or an eligible section 457 plan, and
• The value of qualified transportation fringe benefits.

Generally, compensation does not include:

• Contributions toward a TSA contract (other than elective deferrals),
• Contributions toward a deferred compensation plan if, before applying the limit on employer contributions, the contributions are not taxable,
• Distributions from a deferred compensation plan,
• Proceeds from the disposition of stock acquired under a qualified stock option, and
• Certain other amounts that are excludable from your income, such as group term life insurance premiums that are not taxable.

Note.   Compensation for purposes of the limit on annual additions for 2001 is not the same as includible compensation discussed in chapter 3.

Worksheet E. Compensation Calculation - Limit on Annual Additions, in chapter 13, can help you figure your compensation for the limit on annual additions.

Example

Using the same facts presented in the last Example in chapter 3, Jerry is now ready to figure the second component of his MAC, the limit on annual additions.

Figure Jerry's compensation.   The first step in determining the limit on annual additions is to figure compensation. Jerry's compensation is shown in Table 4-1.

Figure Jerry's limit on annual additions.   After determining compensation, Jerry is now ready to figure the limit on annual additions.

Jerry's limit on annual additions is $9,450 as shown in Table 4-2.

Figuring Jerry's MAC

Jerry has figured both his MEA and his limit on annual additions. To figure his MAC for 2001, Jerry must figure his limit on elective deferrals. This limit is explained in chapter 5.

Table 4-2. Worksheet D. Limit on Annual Additions for 2001

Limit on Elective Deferrals

Important Changes for 2002

Increase in the limit on elective deferrals.   Effective for years beginning in 2002, the limit on elective deferrals has been increased from $10,500 to $11,000.

Credit for elective deferrals.   Effective for years beginning after 2001, you may be eligible to take a percentage of your actual elective deferrals as a credit. For more information, see Publication 553.

You can use this chapter to determine your limit on elective deferrals for 2001 and 2002.

The final component of MAC is the limit on elective deferrals. This is a limit on the amount of contributions that can be made to your account through a salary reduction agreement.

A salary reduction agreement is an agreement between you and your employer allowing for a portion of your compensation to be directly invested in a 403(b) account on your behalf. You can enter into more than one salary reduction agreement during a year.

This chapter discusses:

• The general limit on elective deferrals, and
• The 15-year rule, an increased limit on elective deferrals.

More than one 403(b) account. If, for any year elective deferrals are contributed to more than one 403(b) account for you (whether or not with the same employer), you must combine all the elective deferrals to determine whether the total is more than the limit for that year.

403(b) plan and another retirement plan. If, during the year, contributions in the form of elective deferrals are made to other retirement plans on your behalf, you must combine all of the elective deferrals to determine if they are more than your limit on elective deferrals. The limit on elective deferrals applies to amounts contributed to:

• 401(k) plans, to the extent excluded from income,
• Section 501(c)(18) plans created before June 25, 1959, to the extent excluded from income,
• SIMPLE Plans,
• Simplified employee pension (SEP) plans, and
• All 403(b) plans.

General Limit

Under the general limit on elective deferrals, the most that can be contributed to your 403(b) account through a salary reduction agreement for 2001 is $10,500. The limit for 2002 is $11,000. This limit applies without regard to community property laws.

Excess elective deferrals.   If the amount contributed is more than the allowable limit, you must include the excess in your gross income for the year contributed. This is explained in chapter 11.

15-Year Rule

If you have at least 15 years of service with a public school system, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches (or associated organization), and you are an eligible employee (as described in chapter 1), the limit on elective deferrals to your 403(b) account is increased by the least of:

• $3,000,
• $15,000, reduced by increases to the general limit you were allowed in earlier years because of this rule, or
• $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years.

If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $13,500 for 2001 and $14,000 for 2002.

Excess elective deferrals.   If the amount contributed is more than the allowable limit, you must include the excess in your gross income for the year contributed. This is explained in chapter 11.

Figuring the Limit on Elective Deferrals

Worksheet F in chapter 13 can be used to figure the limit on elective deferrals.

Example

Based on the rules in chapters 3 and 4, Jerry has figured his MEA and his limit on annual additions. The last component needed before he can determine his MAC for 2001 is the limit on elective deferrals.

Figuring Jerry's 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 $10,500, as shown in Table 5-1.

Figuring Jerry's MAC

Jerry has determined his MEA to be $24,820. His limit on annual additions is $9,450 and his limit on elective deferrals is $10,500. Based on this, the maximum amount that could have been contributed to a 403(b) account on Jerry's behalf in 2001 is $9,450, the least of the three limits.

All three components are pulled together in Table 5-2.

Table 5-2. Worksheet 1. Maximum Amount Contributable for 2001

Table 5-1. Worksheet F. Limit on Elective Deferrals

Table 5-1.Worksheet F. Limit on Elective Deferrals

Alternative Limits on Annual Additions

This chapter applies only to contributions made in 2001. For years beginning after 2001, the alternative limits on annual additions have been repealed. For information on figuring your limit on annual additions for 2002, see chapter 9.

Certain employees can choose to increase their MAC by electing an alternative limit on annual additions. There are three alternative limits.

• The year of separation from service limit.
• The any year limit.
• The overall limit.

This chapter will discuss the following topics.

• Who is eligible to use an alternative limit.
• Each of the alternative limits.
• How to elect an alternative limit.

The general limit on annual additions is discussed in chapter 4.

Effect of election.   Generally, the election to use either the any year limit or the year of separation from service limit allows you to exclude from gross income a larger amount of employer contributions than would have been allowed under the general rule that limits employer contributions to 25% of your compensation. If you elect to use the overall limit, you may be able to exclude a larger amount because you can disregard the MEA that would otherwise apply.

Excess contributions.   If employer contributions were included in your income for a tax year because they exceeded any of these alternative limits for that year, the excess reduces the amount of your MEA for later years, even though the excess has already been included in your income.

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