Maximum Amount Contributable (MAC)

For tax years beginning after 2001, the maximum exclusion allowance (MEA) has been repealed.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

Ministers and Church Employees

For 2002, self-employed ministers and church employees who participate in 403(b) plans generally follow the same rules as other 403(b) plan participants.

This means that if you are a self-employed minister or a church employee, your MAC for 2002 is the lesser of your:

• Limit on annual additions, or
• Limit on elective deferrals.

The rules for figuring your limit on annual additions for 2002 are explained below under Limit on annual additions. To figure your limit on elective deferrals for 2002, follow the rules explained earlier in this chapter under Limit on Elective Deferrals.

Limit on annual additions.    If you are a self-employed minister or a church employee, your limit on annual additions for 2002 generally is the lesser of:

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

When figuring your includible compensation for your most recent year of service, do not include employer contributions to your 403(b) account, even if you are a foreign missionary.

As this publication was being prepared for print, Congress was considering legislation that would allow foreign missionaries to include these contributions as includible compensation. For more information see, your plan administrator.

Increased limit.   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.

Years of service.   For years beginning after 2001, you will figure your years of service separately for each employer.

As this publication was being prepared for print, Congress was considering legislation that would allow church employees to treat all years of service with related church organizations as years of service with one employer. For more information, see your plan administrator.

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

A 457 plan is a nonqualified, deferred compensation plan established by state and local governments and tax-exempt governments and tax-exempt employers.

For years beginning after 2001, participation in a 457 plan has no effect on contributions made to your 403(b) plan.

If you are contributing to a 457 plan, see your plan administrator for more information.

Catch-Up Contributions

The most that can be contributed to your 403(b) account after 2001 is the lesser of your limit on annual additions or your limit on elective deferrals.

If you are age 50 or older before the end of the plan year, you may also be able to make additional catch-up contributions. These additional contributions cannot be made with after-tax employee contributions.

You are eligible to make catch-up contributions if:

• You have reached age 50 before the close of the plan year (see your plan administrator to determine the close of your plan year), and
• The maximum amount of elective deferrals that can be made to your 403(b) account have been made for the plan year.

The maximum amount of catch-up contributions for 2002, is the lesser of

• $1,000, or
• Your includible compensation minus your actual deferrals for the year.

Catch-up contributions do not affect your MAC. Therefore, the maximum amount that you are allowed to have contributed to your 403(b) account is your MAC plus your allowable catch-up contribution.

You can use Worksheet H in chapter 13 to figure your catch-up contributions.

Excess Contributions

If your actual contributions are greater than your MAC, you have an excess contribution. Excess contributions can result in income tax, additional taxes, and penalties. The effect of excess contributions depends on the type of excess contribution. This chapter discusses excess contributions to your 403(b) account.

Preventing Excess Contributions

To prevent excess contributions, you should figure your MAC at the beginning of each year using a reasonable estimate of compensation. If, at any time during the year, your employment status or your compensation changes, you should refigure your MAC using a revised estimate of compensation.

How Do I Know If I Have Excess Contributions?

At the end of the year or the beginning of the next year, you should refigure your MAC based on your actual compensation and actual contributions made to your account.

If the actual contributions to your account are greater than your MAC, you have excess contributions.

Worksheet 6. Calculation of Excess 403(b) Contributions for 2001, can be used to figure the amount, if any, of excess contributions and help you identify the type of excess contribution. Worksheet 6 is in chapter 13.

What Happens If I Have Excess Contributions?

Certain excess contributions in a 403(b) account can be corrected. The effect of an excess 403(b) contribution will depend on the type of excess contribution.

Types of excess contributions.   If, after checking your actual contributions, you determine that you have an excess, the first thing is to identify the type of excess that you have. Excess contributions to a 403(b) account are categorized as either an:

• Excess amount, or
• Excess deferral.

Excess Amount

An excess amount is a contribution that is more than your MEA or your limit on annual additions.

Amounts in excess of MEA.   Amounts that are more than your MEA will be included in your income in the year of the excess contribution.

Note.   There is no MEA for years beginning after 2001.

Amounts in excess of limit on annual additions.   In the year that your contributions are more than your limit on annual additions, the excess amount will be included in your income.

Amounts in excess of the limit on annual additions that are due to elective deferrals may be distributed if the excess contributions were made for any one of several reasons, including:

• A reasonable error in determining the amount of elective deferrals that could be made under the limit on annual additions, or
• A reasonable error in estimating your compensation.

Excess Deferral

An excess deferral is the amount that is more than your limit on elective deferrals. To determine your limit on elective deferrals, see chapter 5.

Your employer's 403(b) plan may contain language permitting it to distribute excess deferrals. If so, it may require that, in order to get a distribution of excess deferrals, you either notify the plan of the amount of excess deferrals or designate a distribution as an excess deferral. The plan may require that the notification or designation be in writing and may require that you certify or otherwise establish that the designated amount is an excess deferral. A plan is not required to permit distribution of excess deferrals.

Correction of excess deferrals during year.   If you have excess deferrals for a year, a corrective distribution may be made only if both of the following conditions are satisfied.

• You or your employer designate the distribution as an excess deferral to the extent you have excess deferrals for the year.
• The correcting distribution is made after the date on which the excess deferral was made.

Correction of excess deferrals after the year.   If you have excess deferrals for a year, you may receive a corrective distribution of the excess deferral no later than April 15 of the following year. The plan can distribute the excess deferral (and any income allocable to the excess) no later than April 15 of the year following the year the excess deferral was made.

Tax treatment of excess deferrals.   If the excess deferral is distributed no later than April 15, it is included in your income in the year contributed and the earnings on the excess deferral will be taxed in the year distributed.

Example.   William's MAC for 2000 was $10,500. All of William's contributions were made through salary reductions. He contributed $11,500 in 2000, an excess deferral of $1,000. He notified his plan administrator and his employer of the excess contribution on March 15, 2001, and the excess deferral was distributed on April 13, 2001. Because the excess deferral was distributed before April 15, 2001, the excess deferral will be included in his income for 2000, and any earnings on the excess is included in his income in the year they are distributed.

If you do not receive a distribution of excess elective deferrals by April 15 of the year following the year it is contributed, it will be included in your earned income in the year contributed and in the year distributed.

Example.   Assume that, in the previous example, a distribution of the excess deferral was not made to William by April 15, 2001. Because the distribution was not made timely, the excess deferral will be taxed in 2000 (the year contributed) and again in the year the excess deferral is distributed. The earnings on the distribution will be taxed in the year they are distributed.

Excise Taxes

If your 403(b) account invests in mutual funds, and you exceed either your limit on annual additions or your MEA, you may be subject to a 6% excise tax on the excess contribution. The excise tax does not apply to funds in an annuity account or to excess deferrals.

You must pay the excise tax each year in which there are excess contributions in your account. Excess contributions can be corrected by contributing less than the applicable limit in later years or by making permissible distributions.

You cannot deduct the excise tax.

Permissible distributions.   A permissible distribution is a distribution that can be made when one of the following events occurs.

• You reach age 59½.
• You have a severance from employment.
• You die.
• You become disabled.
• In the case of salary reduction contributions, you encounter financial hardship.

Reporting requirement.   You must file Form 5330 if there has been an excess contribution to a custodial account and that excess has not been corrected.

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