4.   Limit on Elective Deferrals

The second and 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 that allows 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.

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,

  • Roth contribution programs,

  • Section 501(c)(18) plans, to the extent excluded from income,

  • Savings incentive match plan for employees (SIMPLE plans),

  • Simplified employee pension (SEP) plans, and

  • All 403(b) plans.

Roth contribution program.   Your 403(b) plan may allow you to designate all or a portion of your elective deferrals as Roth contributions. Elective deferrals designated as Roth contributions must be maintained in a separate Roth account and are not excludable from your gross income.

  The maximum amount of contributions allowed under a Roth contribution program is your limit on elective deferrals, less your elective deferrals not designated as Roth contributions. For more information on the Roth contribution program, see Publication 560, Retirement Plans for Small Business.

Excess elective deferrals.   If the amount contributed is more than the allowable limit, you must include the excess that is not a Roth contribution in your gross income for the year contributed.

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 is $17,500 for 2013 and 2014. This limit applies without regard to community property laws.

15-Year Rule

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

  1. $3,000,

  2. $15,000, reduced by the sum of:

    1. The additional pre-tax elective deferrals made in prior years because of this rule, plus

    2. The aggregate amount of designated Roth contributions permitted for prior years because of this rule, or

  3. $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 $20,500 for 2013 and 2014.

To determine whether you have 15 years of service with your employer, see Years of Service , next.

Years of Service

To determine if you are eligible for the increased limit on elective deferrals, you will first need to figure your years of service. How you figure your years of service depends on whether you were a full-time or a part-time employee, whether you worked for the full year or only part of the year, and whether you have worked for your employer for an entire year.

You must figure years of service for each year during which you worked for the employer who is maintaining your 403(b) account.

If more than one employer maintains a 403(b) account for you in the same year, you must figure years of service separately for each employer.

Definition

Your years of service are the total number of years you have worked as a full time employee for the employer maintaining your 403(b) account as of the end of the year.

Figuring Your Years of Service

Take the following rules into account when figuring your years of service.

Status of employer.   Your years of service include only periods during which your employer was a qualified employer. Your plan administrator can tell you whether or not your employer was qualified during all your periods of service.

Service with one employer.   Generally, you cannot count service for any employer other than the one who maintains your 403(b) account.

Church employee.   If you are a church employee, treat all of your years of service with related church organizations as years of service with the same employer. For more information about church employees, see chapter 5.

Self-employed ministers.   If you are a self-employed minister, your years of service include full and part years in which you have been treated as employed by a tax-exempt organization that is a qualified employer.

Total years of service.   When figuring prior years of service, figure each year individually and then add the individual years of service to determine your total years of service.

Example.

The annual work period for full-time teachers employed by ABC Public Schools is September through December and February through May. Marsha began working with ABC schools in September 2009. She has always worked full-time for each annual work period. At the end of 2013, Marsha had 4.5 years of service with ABC Public Schools, as shown in Table 4-1.

Table 4-1. Marsha's Years of Service

Note. This table shows how Marsha figures her years of service, as explained in the previous example.

Year Period Worked Portion of Work Period Years of Service
2009 Sept.–Dec. .5 year .5 year
2010 Feb.–May .5 year 1 year
Sept.–Dec. .5 year
2011 Feb.–May .5 year 1 year
Sept.–Dec. .5 year
2012 Feb.–May .5 year 1 year
Sept.–Dec. .5 year
2013 Feb.–May .5 year 1 year
Sept.–Dec. .5 year
Total years of service 4.5 years

Full-time or part-time.   To figure your years of service, you must analyze each year individually and determine whether you worked full-time for the full year or something other than full-time. When determining whether you worked full-time or something other than full-time, use your employer's annual work period as the standard.

Employer's annual work period.   Your employer's annual work period is the usual amount of time an individual working full-time in a specific position is required to work. Generally, this period of time is expressed in days, weeks, months, or semesters, and can span 2 calendar years.

Note.

You cannot accumulate more than 1 year of service in a 12-month period.

Example.

All full-time teachers at ABC Public Schools are required to work both the September through December semester and the February through May semester. Therefore, the annual work period for full-time teachers employed by ABC Public Schools is September through December and February through May. Teachers at ABC Public Schools who work both semesters in the same calendar year are considered working a full year of service in that calendar year.

Full-Time Employee for the Full Year

Count each full year during which you were employed full-time as 1 year of service. In determining whether you were employed full-time, compare the amount of work you were required to perform with the amount of work normally required of others who held the same position with the same employer and who generally received most of their pay from the position.

How to compare.   You can use any method that reasonably and accurately reflects the amount of work required. For example, if you are a teacher, you can use the number of hours of classroom instruction as a measure of the amount of work required.

  In determining whether positions with the same employer are the same, consider all of the facts and circumstances concerning the positions, including the work performed, the methods by which pay is determined, and the descriptions (or titles) of the positions.

Example.

An assistant professor employed in the English department of a university will be considered a full-time employee if the amount of work that he or she is required to perform is the same as the amount of work normally required of assistant professors of English at that university who get most of their pay from that position.

  If no one else works for your employer in the same position, compare your work with the work normally required of others who held the same position with similar employers or similar positions with your employer.

Full year of service.   A full year of service for a particular position means the usual annual work period of anyone employed full-time in that general type of work at that place of employment.

Example.

If a doctor works for a hospital 12 months of a year except for a 1-month vacation, the doctor will be considered as employed for a full year if the other doctors at that hospital also work 11 months of the year with a 1-month vacation. Similarly, if the usual annual work period at a university consists of the fall and spring semesters, an instructor at that university who teaches these semesters will be considered as working a full year.

Other Than Full-Time for the Full Year

If, during any year, you were employed full-time for only part of your employer's annual work period, part-time for the entire annual work period, or part-time for only part of the work period, your year of service for that year is a fraction of your employer's annual work period.

Full-time for part of the year.   If, during a year, you were employed full-time for only part of your employer's annual work period, figure the fraction for that year as follows:
  • The numerator (top number) is the number of weeks, months, or semesters you were a full-time employee.

  • The denominator (bottom number) is the number of weeks, months, or semesters considered the normal annual work period for the position.

Example.

Jason was employed as a full-time instructor by a local college for the 4 months of the 2013 spring semester (February 2013 through May 2013). The annual work period for the college is 8 months (February through May and July through October). Given these facts, Jason was employed full-time for part of the annual work period and provided ½ of a year of service. Jason's years of service computation for 2013 is as follows:

Number of months Jason worked = 4 = 1
Number of months in annual work period 8 2

Part-time for the full year.   If, during a year, you were employed part-time for the employer's entire annual work period, you figure the fraction for that year as follows:
  • The numerator (top number) is the number of hours or days you worked.

  • The denominator (bottom number) is the number of hours or days normally required of someone holding the same position who works full-time.

Example.

Vance teaches one course at a local medical school. He teaches 3 hours per week for two semesters. Other faculty members at the same school teach 9 hours per week for two semesters. The annual work period of the medical school is two semesters. An instructor teaching 9 hours a week for two semesters is considered a full-time employee. Given these facts, Vance has worked part-time for a full annual work period. Vance has completed 1/3 of a year of service, figured as shown below.

Number of hours per week Vance worked = 3 = 1
Number of hours per week considered full-time 9 3

Part-time for part of the year.   If, during any year, you were employed part-time for only part of your employer's annual work period, you figure your fraction for that year by multiplying two fractions.

  Figure the first fraction as though you had worked full-time for part of the annual work period. The fraction is as follows:
  • The numerator (top number) is the number of weeks, months, or semesters you were a full-time employee.

  • The denominator (bottom number) is the number of weeks, months, or semesters considered the normal annual work period for the position.

  Figure the second fraction as though you had worked part-time for the entire annual work period. The fraction is as follows:
  • The numerator (top number) is the number of hours or days you worked.

  • The denominator (bottom number) is the number of hours or days normally required of someone holding the same position who works full-time.

  Once you have figured these two fractions, multiply them together to determine the fraction representing your partial year of service for the year.

Example.

Maria, an attorney, teaches a course for one semester at a law school. She teaches 3 hours per week. The annual work period for teachers at the school is two semesters. All full-time instructors at the school are required to teach 12 hours per week. Based on these facts, Maria is employed part-time for part of the annual work period. Her year of service for this year is determined by multiplying two fractions. Her computation is as follows:

Maria's first fraction

Number of semesters Maria worked = 1
Number of semesters in annual work period 2

Maria's second fraction

Number of hours Maria worked per week = 3 = 1
Number of hours per week considered full-time 12 4

Maria would multiply these fractions to obtain the fractional year of service:

1 x 1 = 1        
2 4 8        

Figuring the Limit on Elective Deferrals

You can use Part II of Worksheet 1 in chapter 9 to figure the limit on elective deferrals.

Example

Floyd has figured his limit on annual additions. The only other component needed before he can determine his MAC for 2014 is his limit on elective deferrals.

Figuring Floyd's limit on elective deferrals.   Floyd 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 for 2014 is $17,500 as shown in Table 4-2.

Floyd's employer will not make any nonelective contributions to his 403(b) account and Floyd will not make any after-tax contributions. Additionally, Floyd's employer does not offer a Roth contribution program.

Figuring Floyd's MAC

Floyd has determined that his limit on annual additions for 2014 is $52,000 and his limit on elective deferrals is $17,500. Because elective deferrals are the only contributions made to Floyd's account, the maximum amount that can be contributed to a 403(b) account on Floyd's behalf in 2014 is $17,500, the lesser of both limits.

Table 4-2. Worksheet 1. Maximum Amount Contributable (MAC)

Note. Use this worksheet to figure your MAC.

Part I. Limit on Annual Additions    
1. Enter your includible compensation for your most recent year of service 1. $70,475
2. Maximum:
  • For 2013 enter $51,000

  • For 2014 enter $52,000

2. 52,000
3. Enter the lesser of line 1 or line 2. This is your limit on annual additions 3. 52,000
  Caution: If you had only nonelective contributions, skip Part II and enter the amount from line 3 on line 18.    
Part II. Limit on Elective Deferrals    
4. Maximum contribution:
  • For 2013, enter $17,500

  • For 2014, enter $17,500

4. 17,500
  Note. If you have at least 15 years of service with a qualifying organization, complete lines 5 through 17. If not, enter zero (-0-) on line 16 and go to line 17.    
5. Amount per year of service 5. 5,000
6. Enter your years of service 6.  
7. Multiply line 5 by line 6 7.  
8. Enter the total of all elective deferrals made for you by the qualifying organization for prior years 8.  
9. Subtract line 8 from line 7. If zero or less, enter zero (-0-) 9.  
10. Maximum increase in limit for long service 10. 15,000
11. Enter the total of additional pre-tax elective deferrals made in prior years under the 15-year rule 11.  
12. Enter the aggregate amount of all designated Roth contributions permitted for prior years under the 15-year rule 12.  
13. Add lines 11 and 12 13.  
14. Subtract line 13 from line 10 14.  
15. Maximum additional contributions 15. 3,000
16. Enter the least of lines 9, 14, or 15. This is your increase in the limit for long service 16. -0-
17. Add lines 4 and 16. This is your limit on elective deferrals 17. 17,500
  Part III. Maximum Amount Contributable    
18.
  • If you had only nonelective contributions, enter the amount from line 3. This is your MAC. 
     

  • If you had only elective deferrals, enter the lesser of lines 3 or 17. This is your MAC. 
     

  • If you had both elective deferrals and nonelective contributions, enter the amount from line 3. This is your MAC. (Use the amount on line 17 to determine if you have excess elective deferrals as explained in chapter 7.)

18. $17,500


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