Important Changes for 2001

Amounts previously excludable.   Amounts previously excludable for purposes of figuring your maximum exclusion allowance (MEA) does not include contributions to a defined benefit plan. See chapter 3.

Increase in limit on annual additions.   For 2001, the limit on annual additions, is the lesser of $35,000, or 25% of your compensation. This is an increase from the lesser of $30,000, or 25% of your compensation. See chapter 4.

Increase in limit on contributions to 403(b) plan and 457 plan.   For 2001, the general limit on contributions in the same year to both a 403(b) plan and a 457 plan is the lesser of $8,500 or one-third of your includible compensation. This is an increase from the lesser of $8,000 or one-third of your includible compensation. See chapter 8.

Important Changes for 2002

Maximum amount contributable (MAC).   For tax years beginning after 2001, your MAC is the lesser of the limit on annual additions, or the limit on elective deferrals. See chapter 9.

Repeal of the maximum exclusion allowance (MEA).   For tax years beginning after 2001, you will not need to figure your MEA to determine the maximum amount that can be contributed to your 403(b) account (your MAC). See chapter 9.

Repeal of the minimum exclusion allowance for church employees.   For tax years beginning after 2001, church employees can no longer use the minimum exclusion allowance to figure the maximum amount that can be contributed to a 403(b) account. See chapter 9.

Repeal of the alternative limits on annual additions.   For tax years beginning after 2001, the year of separation from service limit, the any year limit, and the overall limit can no longer be used to figure the limit on annual additions. See chapter 9.

Repeal of the coordination rules between 403(b) plans and 457 plans.   For tax years beginning after 2001, in the year you contribute to both a 403(b) plan and a 457 plan, you do not reduce the maximum deferral limit of the 457 plan by the amount of contributions made to your 403(b) account. If you contribute to a 457 plan in 2002, see your plan administrator for contribution limits. See chapter 9.

Increase in the limit on annual additions.   For tax years beginning after 2001, the limit on annual additions under the general rule is the lesser of $40,000 or 100% of your includible compensation for your most recent year of service. This is an increase from the lesser of $35,000, or 25% of your compensation for the limitation year. See chapter 9.

Increase in the limit on elective deferrals.   For 2002, the limit on elective deferrals has been increased from $10,500 to $11,000. See chapter 9.

Includible compensation used to determine your limit on annual additions.   For tax years beginning after 2001, when figuring the limit on annual additions you will use includible compensation for your most recent year of service and not your compensation for the limitation year. See chapter 9.

Includible compensation after a termination from service.   For tax years beginning after 2001, your includible compensation for your most recent year of service will not include amounts received from a former employer after the fifth year following the year in which your employment is terminated. See chapter 9.

Includible compensation for foreign missionaries.   For tax years beginning after 2001, if you are a foreign missionary, your includible compensation does not include contributions made by the church during the year to your 403(b) account. See chapter 9.

As this publication was being prepared for print, Congress was considering legislation that would allow foreign missionaries to include contributions made by the church during the year to your 403(b) account in includible compensation.

Catch-up contributions for persons age 50 or over.   If you are age 50 or over, you may be permitted to make additional catch-up contributions, of up to $1,000 to your 403(b) plan for 2002. See chapter 10.

Credit for elective deferrals.   For tax 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, Highlights of 2001 Tax Changes.

Exception to rollover rules.   For distributions after 2001, the IRS may waive the 60-day roll- over period if the failure to waive such requirement would be against equity or good conscience, including cases of casualty, disaster, or other events beyond the reasonable control of the individual. See chapter 12.

Direct trustee-to-trustee transfers.   If you make a direct trustee-to-trustee transfer after 2001 from your governmental 403(b) account to a defined benefit governmental plan, it may not be included in your gross income. For more information, see chapter 12.

Rollover options.   For distributions after 2001, you can roll over, tax free, money and other property that would otherwise be taxable from an eligible retirement plan to a 403(b) plan. For more information, see Publication 575.

Additionally, you can roll over, tax free, money and other property that would otherwise be taxable from a 403(b) plan to an eligible retirement plan. For more information see chapter 12.

Rollovers by the surviving spouse.   If you are the surviving spouse of a 403(b) plan participant, you can roll over distributions made after 2001 from your spouse's 403(b) plan to an eligible retirement plan. For more information see chapter 12.

Important Reminders

Includible compensation.   Your includible compensation for your most recent year of service includes the value of qualified transportation fringe benefits received from your employer. See chapter 3.

Compensation.   Your compensation for purposes of figuring your limit on annual additions, for 2001, includes the value of qualified transportation fringe benefits received from your employer. See chapter 4.

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication can help you better understand the tax rules that apply to your 403(b) (tax-sheltered annuity) plan.

In this publication you will find information to help you:

• Determine the maximum amount that can be contributed to your 403(b) account in the current year,
• Determine the maximum amount that could have been contributed to your 403(b) account in the previous year,
• Identify excess contributions,
• Determine the contribution limits for years in which contributions are made to both a 403(b) plan and a 457 plan, and
• Understand the basic rules for distributions and rollovers from 403(b) accounts.

This publication does not provide specific information on the following topics.

• Distributions from 403(b) accounts. This is covered in Publication 575, Pension and Annuity Income.
• Rollovers. This is covered in Publication 590, Individual Retirement Arrangements (IRAs).

How to use this publication.   This publication is organized into chapters to help you find information easily.

Chapter 1 answers questions frequently asked by 403(b) plan participants.

Chapters 2 through 8 explain the rules and terms you need to know to figure the maximum amount that could have been contributed to your 403(b) account for 2001.

Chapter 9 explains how to determine the maximum amount that can be contributed to your 403(b) account (your MAC) for 2002. Chapter 9 explains recent changes and provides examples to assist you in figuring your MAC for 2002.

Chapter 10 explains the requirements for the new catch-up contributions.

Chapter 11 provides general information on the prevention and correction of excess contributions to your 403(b) account.

Chapter 12 provides general information on distributions and rollovers.

Chapter 13 provides blank worksheets that you will need to accurately and actively participate in your 403(b) plan. Filled-in samples of most of these worksheets can be found throughout this publication.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Technical Publications Branch
W:CAR:MP:FP:P
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your area code and daytime phone number in your correspondence.

Useful Items You may want to see:

Publication

• 517   Social Security and Other Information for Members of the Clergy and Religious Workers
• 575   Pension and Annuity Income
• 590   Individual Retirement Arrangements (IRAs)

Form (and Instructions)

• W-2   Wage and Tax Statement
• 1099-R   Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
• 5330   Return of Excise Taxes Related to Employee Benefit Plans

403(b) Plan Basics

This chapter introduces you to 403(b) plans and accounts. Specifically, the chapter answers the following questions.

• What is a 403(b) plan?
• Who can participate in a 403(b) plan?
• Who can set up a 403(b) account?
• How can contributions be made to my 403(b) account?
• Do I report contributions on my tax return?
• How much can be contributed to my 403(b) account?

What is a 403(b) Plan?

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.

Individual accounts in a 403(b) plan can be any of the following types.

• An annuity contract, which is a contract provided through an insurance company,
• A custodial account, which is an account invested in mutual funds, or
• A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.

Note.   Throughout this publication, wherever the term 403(b) account is used, it refers to any one of these funding arrangements, unless otherwise specified.

What are the Benefits of Contributing to a 403(b) Plan?

There are three benefits to contributing to a 403(b) plan.

• The first benefit is that you do not pay tax on the contributions in the year they are made. You do not pay tax on them until you begin making withdrawals from the plan, usually after you retire. Contributions to a 403(b) plan are either excluded or deducted from your income.
• The second benefit is that earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them.
• The third benefit is that for years beginning after 2001, you may be eligible to take a credit for elective deferrals contributed to your 403(b) account. For more information, see Publication 553.

Excluded.   If an amount is excluded from your income, it is not included in your total wages on your Form W-2. This means that you do not report the excluded amount on your tax return.

Deducted.   If an amount is deducted from your income, it is included with your other wages on your Form W-2. You report this amount on your tax return, but you are allowed to subtract it when figuring the amount of income on which you must pay tax.

Who Can Participate in a 403(b) Plan?

Any eligible employee can participate in a 403(b) plan.

Eligible employees.   The following employees are eligible to participate in a 403(b) plan.

• Employees of tax-exempt organizations established under section 501(c)(3) of the Internal Revenue Code. These organizations are usually referred to as section 501(c)(3) organizations or simply 501(c)(3) organizations.
• Certain employees of public school systems. These are employees involved in the day-to-day operations of a school.
• Employees of cooperative hospital service organizations.
• Civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS). (Contributions made after 1979 for the benefit of faculty and staff of USUHS are subject to the rules described in this publication.)
• Employees of public school systems organized by Indian tribal governments.
• Certain ministers (explained next).

Ministers.   The following ministers are eligible employees for whom a 403(b) account can be established.

1. Ministers employed by section 501(c)(3) organizations.
2. Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.
3. Ministers (chaplains) who meet all three of the following requirements.
   1. They are employed by organizations that are not section 501(c)(3) organizations.
   2. They function as ministers in their day-to-day professional responsibilities with their employers.
   3. They do not share common religious bonds with their employers.

Note.   Throughout this publication, the term chaplain will be used to mean ministers described in the third category in the list above.

Example.   A minister employed as a chaplain by a state-run prison and a chaplain in the United States Armed Forces are eligible employees because their employers are not section 501(c)(3) organizations, they are employed as ministers, and their employers do not share their religious affiliation.

Who Can Set Up a 403(b) Account?

You cannot set up your own 403(b) account. Only employers can set up 403(b) accounts. A self-employed minister cannot set up a 403(b) account for his or her benefit. If you are a self-employed minister, only the organization (denomination) with which you are associated can set up an account for your benefit.

How Can Contributions Be Made to My 403(b) Account?

Generally, only your employer can make contributions to your 403(b) account. However, some plans will allow you to make after-tax contributions (defined later).

The following types of contributions can be made to 403(b) accounts.

1. Elective deferrals. These are contributions made under a salary reduction agreement. This agreement allows your employer to withhold money from your paycheck to be contributed directly into a 403(b) account for your benefit. You do not pay tax on these contributions until you withdraw them from the account.
2. Nonelective contributions . These are employer contributions that are not made under a salary reduction agreement. You do not pay tax on these contributions until you withdraw them from the account. Nonelective contributions include matching contributions, discretionary contributions, and mandatory contributions from your employer.
3. After-tax contributions. These are contributions you make with funds that you must include in income on your tax return. A salary payment on which income tax has been withheld is a source of these contributions. If your plan allows you to make after-tax contributions, they are not excluded from income and you cannot deduct them on your tax return.
4. A combination of any of the three contribution types listed above.

Self-employed minister.   If you are a self-employed minister, you are considered both an employee and an employer, and you can contribute to a retirement income account for your own benefit.

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