| Pub. 571, Tax-Sheltered Annuity Plans (403(b) Plans) |
2004 Tax Year |
Chapter 3 - Limit on Annual Additions
This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
The first component of MAC is the limit on annual additions. This is a limit on the total contributions (elective deferrals,
nonelective
contributions and after-tax contributions) that can be made to your 403(b) account. The limit on annual additions generally
is the lesser of:
-
$41,000 ($42,000 for 2005), or
-
100% of your 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.
You can use Part I of Worksheet 1 in chapter 9 to figure your limit on annual additions.
Ministers and church employees.
If you are a minister or a church employee, you may be able to increase your limit on annual additions or use different
rules when figuring your
limit on annual additions. For more information, see chapter 5.
Includible Compensation for Your Most Recent Year of Service
Definition.
Generally, “ includible compensation for your most recent year of service” is the amount of taxable wages and benefits you received from the
employer that maintained a 403(b) account for your benefit during your most recent year of service.
When figuring your includible compensation for your most recent year of service, keep in mind that your most recent year of
service may not be the
same as your employer's most recent annual work period. This can happen if your tax year is not the same as your employer's
annual work period.
When figuring includible compensation for your most recent year of service, do not mix compensation or service of one employer
with compensation or
service of another employer.
Most Recent Year of Service
Your “most recent year of service” is your last full year of service, ending on the last day of your tax year that you worked for the employer
that maintains a 403(b) account on your behalf.
Tax year different from employer's annual work period.
If your tax year is not the same as your employer's annual work period, your most recent year of service is made up
of parts of at least two of
your employer's annual work periods.
Example.
A professor who reports her income on a calendar-year basis is employed on a full-time basis by a university that operates
on an academic year
(October through May). For purposes of figuring her includible compensation for her most recent year of service for 2004,
the professor's most recent
year of service consists of her service performed during January through May of 2004 and her service performed during October
through December of
2004.
Figuring Your Most Recent Year of Service
To figure your most recent year of service, begin by determining what constitutes a full year of service for your position.
A “full year of
service” is equal to full-time employment for your employer's annual work period.
After identifying a full year of service, begin counting the service you have provided for your employer starting with the
service provided in the
current year.
Part-time or employed only part of year.
If you are a part-time employee, or a full-time employee who is employed for only part of the year, your most recent
year of service consists of
your service this year and your service for as many previous years as is necessary to total one full year of service. You
add up your most recent
periods of service to determine your most recent year of service. First, take into account your service during the year for
which you are figuring the
limit on annual additions. Then add your service during your next preceding tax year, and years before that, until either
your total service equals 1
year of service or you have taken into account all of your service with the employer.
Example.
You were employed on a full-time basis during the months July through December 2002 (1/2 year of service), July through December
2003 (1/2 year of
service), and October through December 2004 (1/4 year of service). Your most recent year of service for purposes of computing
your limit on annual
additions for 2004 is the total of your service during 2004 (1/4 year of service), your service during 2003 (1/2 year of service),
and your service
during the months October through December 2002 (1/4 year of service).
Not yet employed for 1 year.
If, at the close of the year, you have not yet worked for your employer for 1 year (including time you worked for
the same employer in all earlier
years), use the period of time you have worked for the employer as your most recent year of service.
After identifying your most recent year of service, the next step is to identify the includible compensation associated with
that full year of
service.
Includible compensation is not the same as income included on your tax return. “Compensation” is a combination of income and benefits received
in exchange for services provided to your employer.
Generally, “includible compensation” is the amount of income and benefits:
You determine the amount you must include in income without taking into account the foreign earned income exclusion.
Includible compensation does include the following amounts.
-
Elective deferrals (employer's contributions made on your behalf under a salary reduction agreement).
-
Amounts contributed or deferred by your employer under a section 125 cafeteria plan.
-
Amounts contributed or deferred, at the election of the employee, under an eligible section 457 nonqualified deferred compensation
plan
(state or local government or tax-exempt organization plan).
-
Wages, salaries, and fees for personal services earned with the employer maintaining your 403(b) account.
-
Income otherwise excluded under the foreign earned income exclusion.
-
The value of qualified transportation fringe benefits (including transit passes, certain parking, and transportation in a
commuter highway
vehicle between your home and work).
Includible compensation does not include the following items.
-
Your employer's contributions to your 403(b) account.
-
Compensation earned while your employer was not an eligible employer.
-
Your employer's contributions to a qualified plan that:
-
Are on your behalf, and
-
Are excludable from income.
-
The cost of incidental life insurance.
If you are a church employee or a foreign missionary, figure includible compensation using the rules explained in chapter
5.
Contributions after retirement.
Nonelective contributions may be made for an employee for up to five years after retirement. These contributions would
be based on includible
compensation for the last year of service before retirement.
Cost of Incidental Life Insurance
Includible compensation does not include the cost of incidental life insurance.
If all of your 403(b) accounts invest only in mutual funds, then you have no incidental life insurance.
If you have an annuity contract, a portion of the cost of that contract may be for incidental life insurance. If so, the cost
of the insurance is
taxable to you in the year contributed and is considered part of your basis when distributed. Your employer will include the
cost of your insurance as
taxable wages in box 1 of Form W-2.
Not all annuity contracts include life insurance. Contact your plan administrator to determine if your account includes incidental
life insurance.
If it does, you will need to figure the cost of life insurance each year the policy is in effect.
Figuring the cost of incidental life insurance. If you have determined that part of the cost of your annuity contract is for an
incidental life insurance premium, you will need to determine the amount of the premium and subtract it from your includible
compensation.
To determine the amount of the life insurance premiums you will need to know the following information.
-
The value of your life insurance contract, which is the amount payable upon your death.
-
The cash value of your life insurance contract at the end of the tax year.
-
Your age on your birthday nearest the beginning of the policy year.
-
Your current life insurance protection under an ordinary retirement income life insurance policy, which is the amount payable
upon your
death minus the cash value of the contract at the end of the year.
You can use Worksheet A, Cost of Incidental Life Insurance in chapter 9 to determine the cost of your incidental life insurance.
Example.
Your new contract provides that your beneficiary will receive $10,000 if you should die anytime before retirement. Your cash
value in the contract
at the end of the first year is zero. Your current life insurance protection for the first year is $10,000 ($10,000 - 0).
The cash value in the contract at the end of year two is $1,000, and the current life insurance protection for the second
year is $9,000 ($10,000
– $1,000).
The one-year cost of the protection can be calculated by using Figure 3-1, Uniform One-Year Term Premiums for $1,000 Life Insurance
Protection. The premium rate is determined according to your age on your birthday nearest the beginning of the policy year.
Figure 3–1. Uniform One-Year Term Premiums for $1,000 Life Insurance Protection
| Age |
Cost |
|
Age |
Cost |
|
15
|
$1.27
|
|
49
|
$8.53
|
|
16
|
1.38
|
|
50
|
9.22
|
|
17
|
1.48
|
|
51
|
9.97
|
|
18
|
1.52
|
|
52
|
10.79
|
|
19
|
1.56
|
|
53
|
11.69
|
|
20
|
1.61
|
|
54
|
12.67
|
|
21
|
1.67
|
|
55
|
13.74
|
|
22
|
1.73
|
|
56
|
14.91
|
|
23
|
1.79
|
|
57
|
16.18
|
|
24
|
1.86
|
|
58
|
17.56
|
|
25
|
1.93
|
|
59
|
19.08
|
|
26
|
2.02
|
|
60
|
20.73
|
|
27
|
2.11
|
|
61
|
22.53
|
|
28
|
2.20
|
|
62
|
24.50
|
|
29
|
2.31
|
|
63
|
26.63
|
|
30
|
2.43
|
|
64
|
28.98
|
|
31
|
2.57
|
|
65
|
31.51
|
|
32
|
2.70
|
|
66
|
34.28
|
|
33
|
2.86
|
|
67
|
37.31
|
|
34
|
3.02
|
|
68
|
40.59
|
|
35
|
3.21
|
|
69
|
44.17
|
|
36
|
3.41
|
|
70
|
48.06
|
|
37
|
3.63
|
|
71
|
52.29
|
|
38
|
3.87
|
|
72
|
56.89
|
|
39
|
4.14
|
|
73
|
61.89
|
|
40
|
4.42
|
|
74
|
67.33
|
|
41
|
4.73
|
|
75
|
73.23
|
|
42
|
5.07
|
|
76
|
79.63
|
|
43
|
5.44
|
|
77
|
86.57
|
|
44
|
5.85
|
|
78
|
94.09
|
|
45
|
6.30
|
|
79
|
102.23
|
|
46
|
6.78
|
|
80
|
111.04
|
|
47
|
7.32
|
|
81
|
120.57
|
|
48
|
7.89
|
|
|
|
| |
|
|
|
|
If the current published premium rates per $1,000 of insurance protection charged by an insurer for individual one-year term
life insurance
premiums available to all standard risks are lower than those in the preceding table, you can use the lower rates for figuring
the cost of insurance
in connection with individual policies issued by the same insurer.
Example 1.
Lynne Green, age 44 and her employer enter into a 403(b) plan that will provide her with a $500 a month annuity upon retirement
at age 65. The
agreement also provides that if she should die before retirement, her beneficiary will receive the greater of $20,000 or the
cash surrender value in
the life insurance contract. Using the facts presented we can determine the cost of Lynne's life insurance protection as shown
in Table 3-1.
Lynne's employer has included $117 for the cost of the life insurance protection in her current year's income. When figuring
her includible
compensation for this year, Lynne will subtract $117.
Example 2.
Lynne's cash value in the contract at the end of the second year is $1,000. In year two, the cost of Lynne's life insurance
is calculated as shown
in Table 3-2.
Table 3-1. Worksheet A. Cost of Incidental Life Insurance
Note. Use this worksheet to figure the cost of incidental life insurance included in your annuity contract. This amount will be
used to figure
includible compensation for your most recent year of service.
|
1.
|
Enter the value of the contract (amount payable upon your death)
|
1.
|
$20,000.00
|
|
2.
|
Enter the cash value in the contract at the end of the year
|
2.
|
0.00
|
|
3.
|
Subtract line 2 from line 1. This is the value of your current life insurance protection
|
3.
|
$20,000.00
|
|
4.
|
Enter your age on your birthday nearest the beginning of the policy year
|
4.
|
44
|
|
5.
|
Enter the 1-year term premium for $1,000 of life insurance based on your age. (From Figure 3–1)
|
5.
|
$5.85
|
|
6.
|
Divide line 3 by $1,000
|
6.
|
20
|
|
7.
|
Multiply line 6 by line 5. This is the cost of your incidental life insurance
|
7.
|
$117.00
|
Table 3-2. Worksheet A. Cost of Incidental Life Insurance
Note. Use this worksheet to figure the cost of incidental life insurance included in your annuity contract. This amount will be
used to figure
includible compensation for your most recent year of service.
|
1.
|
Enter the value of the contract (amount payable upon your death)
|
1.
|
$20,000.00
|
|
2.
|
Enter the cash value in the contract at the end of the year
|
2.
|
$1,000.00
|
|
3.
|
Subtract line 2 from line 1. This is the value of your current life insurance protection
|
3.
|
$19,000.00
|
|
4.
|
Enter your age on your birthday nearest the beginning of the policy year
|
4.
|
45
|
|
5.
|
Enter the 1-year term premium for $1,000 of life insurance based on your age. (From Figure 3–1)
|
5.
|
$6.30
|
|
6.
|
Divide line 3 by $1,000
|
6.
|
19
|
|
7.
|
Multiply line 6 by line 5. This is the cost of your incidental life insurance
|
7.
|
$119.70
|
In year two, Lynne's employer will include $119.70 in her current year's income. Lynne will subtract this amount when figuring
her includible
compensation.
Figuring Includible Compensation for Your Most Recent Year of Service
You can use Worksheet B in chapter 9 to determine your includible compensation for your most recent year of service.
Example.
Floyd has been periodically working full time for a local hospital since September 2002. He needs to figure his limit on annual
additions for 2005.
The hospital's normal annual work period for employees in Floyd's general type of work runs from January to December.
During the periods that Floyd was employed with the hospital, the hospital has always been eligible to provide a 403(b) plan
to employees.
Additionally, the hospital has never provided the employees with a 457 deferred compensation plan, transportation benefits,
or a cafeteria plan.
Floyd has never worked abroad and there is no life insurance provided under the plan.
Table 3-3 shows the service Floyd provided to his employer, his compensation for the periods worked, his elective deferrals,
and his taxable wages.
Table 3-3. Floyd's Compensation
Note.This table shows information Floyd will use to figure includible compensation for his most recent year of service.
|
Year
|
Years of Service
|
Taxable Wages
|
Elective Deferrals
|
|
2005
|
6/12 of
a year
|
$42,000
|
$2,000
|
|
2004
|
4/12 of
a year
|
$16,000
|
$1,650
|
|
2003
|
4/12 of
a year
|
$16,000
|
$1,650
|
| |
|
|
|
Before Floyd can figure his limit on annual additions, he must figure includible compensation for his most recent year of
service.
Because Floyd is not planning to work the entire 2005 year, his most recent year of service will include the time he is planning
to work in 2005
plus time he worked in the preceding 3 years until the time he worked for the hospital totals one year. If the total time
he worked is less than one
year, Floyd will treat it as if it were one year. He figures his most recent year of service shown in the following list.
-
Time he will work in 2005 is 6/12 of a year.
-
Time worked in 2004 is 4/12 of a year. All of this time will be used to determine Floyd's most recent year of
service.
-
Time worked in 2003 is 4/12 of a year. Floyd only needs 2 months of the 4 months he worked in 2003 to have enough time to
total
one full year. Because he needs only one-half of the actual time he worked, Floyd will use only one-half of his income earned
during that period to
calculate wages that will be used in figuring his includible compensation.
Using the information provided in Table 3-3, wages for Floyd's most recent year of service are $66,000 ($42,000 + $16,000
+ $8,000). His includible
compensation for his most recent year of service is figured as shown in Table 3-4.
After figuring his includible compensation, Floyd determines his limit on annual additions for 2005 to be $42,000, the lesser
of his includible
compensation, $70,475 (Table 3-4), and the maximum amount of $42,000.
Table 3-4. Worksheet B. Includible Compensation for Your Most Recent Year of Service*
Note. Use this worksheet to figure includible compensation for your most recent year of service.
|
1.
|
Enter your includible wages from the employer maintaining your 403(b) account for your most recent year of
service
|
1.
|
$66,000
|
|
2.
|
Enter elective deferrals for your most recent year of service
|
2.
|
4,475
|
|
3.
|
Enter amounts contributed or deferred by your employer under a cafeteria plan for your most recent year of
service
|
3.
|
0
|
|
4.
|
Enter amounts contributed or deferred by your employer to your 457 account (a nonqualified plan of a state or local
government, or of a tax-exempt organization) for your most recent year of service
|
4.
|
0
|
|
5.
|
Enter the value of qualified transportation fringe benefits you received from your employer for your most recent year of
service
|
5.
|
0
|
|
6.
|
Enter your foreign earned income exclusion for your most recent year of service
|
6.
|
0
|
|
7.
|
Add lines 1, 2, 3, 4, 5, and 6
|
7.
|
70,475
|
|
8.
|
Enter the cost of incidental life insurance that is part of your annuity contract for your most recent year of service
|
8.
|
0
|
|
9.
|
Enter compensation that was both:
-
Earned during your most recent year of service, and
-
Earned while your employer was not qualified to maintain a 403(b) plan
|
9.
|
0
|
|
10.
|
Add lines 8 and 9
|
10.
|
0
|
|
11.
|
Subtract line 10 from line 7. This is your includible compensation for your most recent year of service
|
11.
|
70,475
|
|
* Use estimated amounts if figuring includible compensation before the end of the
year. |
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