Who is Eligible to Use an Alternative Limit

If you were an eligible employee (as described in chapter 1) of one of the following organizations, you can use an alternative limit on annual additions.

• Public schools or public school systems.
• Hospitals.
• Home health service agencies.
• Health and welfare agencies.
• Churches or church-related organizations.

You can elect any one of the three alternative limits, but with certain restrictions. For example, you cannot make more than one election per employer and, once an election is made, it is irrevocable and another alternative limit cannot be selected in a subsequent year. However, you can still choose to apply the general rule in any year.

Additionally, certain employees of churches or church-related organizations might be eligible for other special elections that can be used to figure MAC. See chapter 7.

Year of Separation From Service Limit

If you have not elected to use an alternative limit in a prior year, you can use the year of separation from service limit for the limitation year that ends with or within the year you stopped working for the employer who maintained your 403(b) account. If you elect this limit, you use a different method to figure your MEA and your limit on annual additions.

Changes to the MEA.   If you elect the year of separation from service limit, you figure your MEA taking into account only your last 10 years of service with the employer who maintained your 403(b) account and only amounts excludable during your last 10 years of service with that employer.

If you do not have 10 years with your employer, your years of service is the actual amount of years you do have with your employer. Your amount previously excludable is the total contributions excluded in previous years plus any excess contributions for those years that were more than your limit on annual additions.

Changes to the limit on annual additions.   Under the year of separation from service limit, your limit on annual additions is the lesser of:

• 35,000, or
• Your MEA.

Figuring MAC using the year of separation from service limit.   If you have elected the year of separation from service limit, use Worksheet 2 to figure your MAC.

Any Year Limit

If you have not elected to use another alternative limit in an earlier year, you can use the any year limit on annual additions.

Changes in the limit on annual additions.   Your limit on annual additions under the any year limit is the least of:

• $15,000,
• $4,000 plus 25% of your includible compensation for the year in which the limitation year ends, or
• Your MEA for the year in which the limitation year ends.

Figuring MAC using the any year limit.   You can use Worksheet 4 to figure your MAC using the any year limit.

Overall Limit

If you have not elected to use another alternative limit in a prior year, you can use the overall limit.

If you elect the overall limit, you must combine employer contributions to your 403(b) plan with all employer contributions to qualified plans to determine if the limit on annual additions has been exceeded. Additionally, in the year that you use the overall limit, you do not figure the MEA.

Figuring MAC using the overall limit.   You can use Worksheet 3 to figure your MAC using the overall limit.

How To Elect an Alternative Limit

You make the election to use an alternative limit on annual additions by figuring your tax using that limit. The election is considered made only if use of the alternative limit is needed to support the exclusion from income shown on your income tax return.

Election is irrevocable.   If you elect to use an alternative limit, you cannot change the election.

One election allowed.   If you elect one of the alternative limits, you cannot elect to have any of the other alternative limits apply for 2001 for any 403(b) contract purchased for you by the employer.

If in a previous year, you have elected either the any year limit or the overall limit, that limit is the only alternative limit you can use in 2001 to figure your limit on annual additions.

Example.   Janice is employed as a teacher. In 1999, she used the any year limit. In 2000 and 2001, if Janice is working for the same employer, she can use only the general rule or the any year limit on annual additions.

Amending a return to take advantage of an alternative limit.   You can amend an earlier year's tax return to elect an alternative limit on annual additions.

Generally, you must file an amended return by the later of the following.

• 3 years from the date you filed your original return for the year.
• 2 years from the time you paid your tax for that year.

A return filed early is considered filed on the due date.

If you amend an earlier year's return to elect an alternative limit and use of that limit increases your tax for that year, any additional tax due to the use of the alternative limit is not treated as an underpayment of tax for the penalty for failure to pay estimated income tax.

Ministers and Church Employees

This chapter applies only to 2001. Changes for 2002 are explained under Ministers and Church Employees in chapter 9.

Self-employed ministers and church employees are eligible to participate in 403(b) plans. In general, self-employed ministers and church employees follow the rules explained in chapters 2 through 6. Generally, their MAC for 2001 is the least of the following amounts.

• Maximum exclusion allowance (MEA).
• Limit on annual additions.
• Limit on elective deferrals.

Although, in general, the same rules apply, there are changes in how the MEA and the limit on annual additions is calculated. This chapter will explain those changes.

Who is a church employee?   A church employee is anyone who is an employee of a church or a convention or association of churches, including an employee of a tax-exempt organization controlled by or associated with a convention or association of churches.

Maximum Exclusion Allowance (MEA)

For most church employees, the MEA is figured without any changes. However, if your adjusted gross income was less than $17,000 (figured without regard to community property laws), you can exclude from income a minimum exclusion allowance. The minimum exclusion allowance is the lesser of:

• $3,000, or
• Your includible compensation for your most recent year of service.

Changes to Includible Compensation

Includible compensation is figured differently for foreign missionaries and self-employed ministers.

Self-employed minister.   If you were a self-employed minister, you are treated as an employee of a tax-exempt organization that is a qualified employer. Your includible compensation is your net earnings from your ministry minus the contributions made to the retirement plan on your behalf and the deduction for one-half of the self-employment tax.

Foreign missionary.   If you were a foreign missionary in 2001, your includible compensation includes contributions made by the church during the year to your 403(b) account.

You were a foreign missionary if you were either a lay person or a duly ordained, commissioned, or licensed minister of a church and you met both of the following requirements.

• You were an employee of a church or convention or association of churches.
• You were performing services for the church outside the United States.

Changes to Years of Service

Generally, only service with the employer who maintains your 403(b) account can be counted when figuring your MEA. If you are a church employee, treat all of your years of service with related church organizations as years of service with one employer.

If, during your church career, you transfer from one organization to another within the church or to an associated organization, treat all this service as service with a single employer. When these organizations make contributions to your 403(b) account, treat them as made by the same employer.

Self-employed minister.   If you are a self-employed minister, your years of service include full and part years during which you were self-employed.

Limit on Annual Additions

Generally, as a church employee, you can figure your limit on annual additions under either the general limit or (for years before 2002) one of the alternative limits.

You can also elect an increased amount for the limit on annual additions. Under this election, you can increase your limit on annual additions to $10,000 a year. Total contributions over your lifetime under this election cannot be more than $40,000. You cannot use this special election in the year you elect the year of separation from service limit.

Excess contributions.   Generally, the same rules that apply to other participants regarding contribution limits also apply to you. If you are a church employee who figures your MAC using the minimum exclusion allowance and your contributions are more than your limit on annual additions, your excess contributions are the amount that is more than the minimum exclusion allowance. For more information on excess contributions, see chapter 11.

Contributing to Both a 403(b) Plan and a 457 Plan

This chapter does not apply to years beginning after 2001. If in 2002 you contributed to a 457 plan, see your plan administrator for information on figuring your allowable 457 contributions.

This chapter will help participants figure the maximum amount that can be contributed in 2001 to both a 403(b) account and a 457 account.

403(b) plan contributions only. If, in 2001, you were eligible to participate in both a 457 plan and a 403(b) plan but you chose to contribute only to the 403(b) plan, the discussions in this chapter do not apply to you. Read chapters 2 through 6 to determine your MAC for 2001.

457 plan contributions only. If in 2001, you were eligible to participate in both a 457 plan and a 403(b) plan, but you chose not to defer any compensation under the 403(b) plan, you will need to contact your plan administrator to determine your 457 plan limits.

Definition of 457 plan.   A 457 plan is a nonqualified, deferred compensation plan established by state and local governments and tax-exempt employers. In many cases, employers that allow employees to participate in 403(b) plans also offer 457 plans to their employees.

Before 2002, if you participated in both a 403(b) plan and a 457 plan, the 457 plan limits applied to the total combined contributions under both plans. This means that the total contributed to both your 403(b) account and your 457 account for the year could not be more than the 457 plan limits.

Contribution Limits

The maximum amount that could be contributed is determined using either the general limit or the catch-up limit.

General Limit

Under the general limit, the most that could be contributed to your 403(b) account and your 457 account combined is the lesser of the following amounts:

• $8,500, or
• One-third of your includible compensation.

This limit is reduced by elective deferrals under a 401(k) plan, SEP plan, or a SIMPLE IRA.

Includible Compensation

Includible compensation under a 457 plan is not the same as includible compensation under a 403(b) plan.

Generally, includible compensation for a 457 plan is the taxable wages on your Form W-2 from the employer who set up the 457 account on your behalf.

Contributions to a 403(b) plan, 457 plan, 401(k) plan, or a SEP plan, made in the current year, are not part of your includible compensation.

Example.   Sylvia is employed by a local school district. In 2001, her compensation was $24,000. Sylvia had $6,000 contributed to her 457 account through a salary reduction agreement. Her includible compensation is $18,000 ($24,000 - $6,000).

Catch-Up Limit

Under the catch-up limit, contributions for the last 3 years prior to your employer's normal retirement age can be more than the general limit.

Normal retirement age.   Your employer's normal retirement age is generally set by the plan. If no normal retirement age has been specified in the plan, then your normal retirement age is the latest of:

• Age 65, or
• The latest age specified in your employer's basic pension plan.

Maximum contribution.   Under the catch-up limit, the most that can be contributed to your 457 account for a year is the lesser of:

1. $15,000, or
2. The sum of the following two amounts:
   1. The general limit for the year for which you are figuring the catch-up limit, plus
   2. The unused portion of the general limit in prior years.

Add the unused portion of the general limit only for prior years in which all three of the following requirements were met.

• The year began after 1978.
• You were eligible to participate in the 457 plan during the year.
• The general limit applied to contributions made to your account for the year.

403(b) contributions only.   If you were eligible to participate in both a 457 plan and a 403(b) plan during 2001 and you chose to contribute only to a 403(b) plan, contributions to your 403(b) account are taken into consideration in applying the 457 catch-up limit.

If, for each year that you were eligible to participate in both a 457 plan and a 403(b) plan, you elected to defer the maximum amount, through elective deferrals to your 403(b) account, you cannot use the catch-up limit. However, if you did not defer the maximum each year, you may have unused contributions and therefore be eligible to use the catch-up limit.

Example.   Although eligible to participate in both a 457 plan and a 403(b) plan, Jessica has only contributed to a 403(b) plan and has deferred the maximum amount each year. Jessica is now within 3 years of her employer's normal retirement age and wants to take advantage of the 457 catch-up limit and defer $15,000. Jessica has contributed the maximum amount allowable under the 403(b) plan so she has no unused contributions and cannot use the catch-up limit.

However, if Jessica had deferred nothing under the 457 plan and $2,500 under the 403(b) plan, she would have unused contributions, and would therefore be eligible to use the 457 catch-up limit.

Excess 457 Contributions

If there are excess contributions in the year you contribute to both a 457 plan and a 403(b) plan, the contributions are considered excess 457 contributions.

If you have an excess 457 contribution, contact your plan administrator.

Figuring MAC for 2002

Several changes have been made to how you determine the maximum amount that can be contributed to your 403(b) account (your MAC) for 2002. Among these changes are the:

• Repeal of the maximum exclusion allowance (MEA),
• Repeal of the minimum exclusion allowance for certain church employees,
• Repeal of the coordination rules between 403(b) plans and 457 plans,
• Repeal of the alternative limits on annual additions,
• Changes in how the limit on annual additions is figured, and
• Increase in the limit on elective deferrals.

This chapter explains the new rules you need to figure your MAC for 2002 and can help you use them.

Beginning in 2002, in addition to your MAC, you may be able to make catch-up contributions to your 403(b) account. See chapter 10.

Some of the distribution and rollover requirements for 403(b) plan participants also changed. See chapter 12.

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