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Tax-Sheltered Annuity Plans (403(b) Plans), Publication 571 (12/2009)

What's New for 2009

Temporary waiver of the minimum required distribution. For calendar year 2009, there is a temporary waiver of the required minimum distribution from a 403(b) plan. See Minimum Required Distributions in chapter 8 , for more information.

Retirement savings contributions credit. For 2009, the adjusted gross income limitations have increased from $53,000 to $55,500 for married filing jointly filers, from $39,750 to $41,625 for head of household filers, and from $26,500 to $27,750 for single, married filing separately, or qualifying widow(er) with dependent child filers. See chapter 10, Retirement Savings Contributions Credit (Saver's Credit), on page 18 , for additional information.

Limit on elective deferrals. For 2009, the limit on elective deferrals has increased from $15,500 to $16,500.

Limit on annual additions. For 2009 the limit on annual additions has increased from $46,000 to $49,000.

Final regulations. Final income tax regulations pertaining to tax-sheltered annuities within the meaning of section 403(b) of the Internal Revenue Code will, generally, be effective for tax years beginning after December 31, 2008. For more information, see T.D. 9340, which is on page 487 of Internal Revenue Bulletin 2007-36 at www.irs.gov/pub/irs-irbs/irb07–36.pdf. Also see www.irs.gov/retirement.

What's New for 2010

Retirement savings contributions credit. For 2010, the adjusted gross income limitations remain unchanged at $55,500 for married filing jointly filers, $41,625 for head of household filers, and at $27,750 for single, married filing separately, or qualifying widow(er) with dependent child filers. See chapter 10, Retirement Savings Contributions Credit (Saver's Credit), on page 18 , for additional information.

Limit on elective deferrals. For 2010, the limit on elective deferrals remains unchanged at $16,500.

Limit on annual additions. For 2010, the limit on annual additions remains unchanged at $49,000.

Reminders

Rollovers to Roth IRA. Beginning January 1, 2008, distributions from tax-qualified retirement plans and tax-sheltered annuities can be converted by making a rollover into a Roth IRA subject to the restrictions that currently apply to rollovers from a traditional IRA into a Roth IRA.

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 2010.
• Determine the maximum amount that could have been contributed to your 403(b) account in 2009.
• Identify excess contributions.
• Understand the basic rules for claiming the retirement savings contributions credit.
• 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).
• Withdrawals, repayments, and loans from 403(b) annuity contracts for taxpayers who suffered economic losses as a result of: –Hurricane Katrina, Rita, or Wilma are covered in Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. –The May 4, 2007, Kansas storms and tornadoes are covered in Publication 4492-A, Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes. –Damage in the Midwestern disaster areas are covered in Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.

How to use this publication.

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.
• 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
• 5330 Return of Excise Taxes Related to Employee Benefit Plans
• 8915 Qualified Hurricane Retirement Plan Distributions and Repayments

1. 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?
• What are the benefits of contributing to 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.

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 income tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Allowable contributions to a 403(b) plan are either excluded or deducted from your income. However, if your contributions are made to a Roth contribution program, this benefit does not apply. Instead, you pay income tax on the contributions to the plan but distributions from the plan (if certain requirements are met) are tax free. Note. Generally, employees must pay social security and Medicare tax on their contributions to a 403(b) plan, including those made under a salary reduction agreement. See chapter 4, Limit on Elective Deferrals , for more information.
• The second benefit is that earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them. Earnings and gains on amounts in a Roth contribution program are not taxed if your withdrawals are qualified distributions. Otherwise, they are taxed when you withdraw them.
• The third benefit is that you may be eligible to take a credit for elective deferrals contributed to your 403(b) account. See chapter 10, Retirement Savings Contributions Credit (Saver's Credit).

Excluded.

Deducted.

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.
• Employees of public school systems who are 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).
• 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 both 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.

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 below).

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. Except for Roth contributions, you do not pay income tax on these contributions until you withdraw them from the account. If your contributions are Roth contributions, you pay taxes on your contributions but any qualified distributions from your Roth account are tax free.
2. Nonelective contributions . These are employer contributions that are not made under a salary reduction agreement. Nonelective contributions include matching contributions, discretionary contributions, and mandatory contributions from your employer. You do not pay income tax on these contributions until you withdraw them from the account.
3. After-tax contributions . These are contributions (that are not Roth 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.

Do I Report Contributions on My Tax Return?

Generally, you do not report contributions to your 403(b) account (except Roth contributions) on your tax return. Your employer will report contributions on your Form W-2. Elective deferrals will be shown in box 12 and the Retirement plan box will be checked in box 13. If you are a self-employed minister or chaplain, see the discussions next.

Self-employed ministers.

Chaplains.

How Much Can Be Contributed to My 403(b) Account?

There are limits on the amount of contributions that can be made to your 403(b) account each year. If contributions made to your 403(b) account are more than these contribution limits, penalties may apply.

Chapters 2 through 6 provide information on how to determine the amount that can be contributed to your 403(b) account.

Worksheets are provided in Chapter 9 to help you determine the maximum amount that can be contributed to your 403(b) account each year. Chapter 7, Excess Contributions , describes steps you can take to prevent excess contributions and to get an excess contribution corrected.

2. Maximum Amount Contributable (MAC)

Throughout this publication, the limit on the amount that can be contributed to your 403(b) account for any year is referred to as your maximum amount contributable (MAC). This chapter:

• Introduces the components of your MAC,
• Tells you how to figure your MAC, and
• Tells you when to figure your MAC.

Components of Your MAC

Generally, before you can determine your MAC, you must first figure the components of your MAC. The components of your MAC are:

• The limit on annual additions (chapter 3), and
• The limit on elective deferrals (chapter 4).

How Do I Figure My MAC?

Generally, contributions to your 403(b) account are limited to the lesser of:

• The limit on annual additions, or
• The limit on elective deferrals.

Depending upon the type of contributions made to your 403(b) account, only one of the limits may apply to you.

Which limit applies.

Whether you must apply one or both of the limits depends on the type of contributions made to your 403(b) account during the year.

Elective deferrals only.

If the only contributions made to your 403(b) account during the year were elective deferrals made under a salary reduction agreement, you will need to figure both of the limits. Your MAC is the lesser of the two limits.

Nonelective contributions only.

If the only contributions made to your 403(b) account during the year were nonelective contributions (employer contributions not made under a salary reduction agreement), you will only need to figure the limit on annual additions. Your MAC is the limit on annual additions.

Elective deferrals and nonelective contributions.

Worksheets.

When Should I Figure My MAC?

At the beginning of 2010, you should refigure your 2009 MAC based on your actual compensation for 2009. This will allow you to determine if the amount that has been contributed to your 403(b) account for 2009 has exceeded the allowable limits. In some cases, this will allow you to avoid penalties and additional taxes. See chapter 7.

Generally, you should figure your MAC for the current year at the beginning of each tax year using a conservative estimate of your compensation. If your compensation changes during the year, you should refigure your MAC based on a revised conservative estimate. By doing this, you will be able to determine if contributions to your 403(b) account can be increased or should be decreased for the year.

3. Limit on Annual Additions

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:

• $49,000 for 2009 (unchanged for 2010), or
• 100% of your includible compensation for your most recent year of service.

You can use Part I of Worksheet 1 in chapter 9 to figure your limit on annual additions.

Ministers and church employees.

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 allowing 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.

• 401(k) plans, to the extent excluded from income,
• Section 501(c)(18) plans, to the extent excluded from income,
• SIMPLE plans,
• Simplified employee pension (SEP) plans, and
• All 403(b) plans.

Roth contribution program.

Excess elective deferrals.

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

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 $16,500 for 2009 (unchanged for 2010). 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 tax 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 $19,500 for 2009 (unchanged for 2010).

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 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.

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.

Less than 1 year of total service.

Your years of service cannot be less than 1 year. If at the end of your tax year, you have less than 1 year of service (including service in any previous years), figure your limit on annual additions as if you have 1 year.

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.

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, you 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.

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.

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.

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.

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 required of someone holding the same position who works full-time.

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.

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

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 2010 is his limit on elective deferrals.

Figuring Floyd's limit on elective deferrals.

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 2010 is $49,000 and his limit on elective deferrals is $16,500. 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 2010 is $16,500, the lesser of both limits.

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

5. Ministers and Church Employees

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 generally is the lesser of:

• Your limit on annual additions, or
• Your limit on elective deferrals.

For most ministers and church employees, the limit on annual additions is figured without any changes. This means that if you are a minister or church employee, your limit on annual additions generally is the lesser of:

• $49,000 for 2009 (unchanged for 2010), or
• Your includible compensation for your most recent year of service.

Although, in general, the same limit applies, church employees can choose an alternative limit and there are changes in how church employees, foreign missionaries, and self-employed ministers figure includible compensation for the most recent year of service. This chapter will explain the alternative limit and the 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 church or a convention or association of churches.

Alternative Limit for Church Employees

If you are a church employee, you can choose to use $10,000 a year as your limit on annual additions.

Total contributions over your lifetime under this choice cannot be more than $40,000.

Changes to Includible Compensation for Most Recent Year of Service

There are two types of changes in determining includible compensation for the most recent year of service. They are:

• Changes in how the includible compensation of foreign missionaries and self-employed ministers is figured, and
• A change to the years that are counted when figuring the most recent year of service for church employees and self-employed ministers.

Changes to Includible Compensation

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

Foreign missionary.

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. If you are a foreign missionary, and your adjusted gross income is $17,000 or less, contributions to your 403(b) account will not be treated as exceeding the limit on annual additions if the contributions are not in excess of $3,000. You are a foreign missionary if you are either a layperson or a duly ordained, commissioned, or licensed minister of a church and you meet both of the following requirements.

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

Self-employed minister.

If you are 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.

Changes to Years of Service

Generally, only service with the employer who maintains your 403(b) account can be counted when figuring your limit on annual additions.

Church employees.

If you are a church employee, treat all of your years of service as an employee of a church or a convention or association of churches as years of service with one 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.

6. Catch-Up Contributions

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

If you will be age 50 or older by the end of the 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 will have reached age 50 by the end of the 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 is the lesser of:

• $5,500 for 2009 (unchanged for 2010), or
• The excess of your compensation for the year, over the elective deferrals that are not catch-up contributions.

Figuring catch-up contributions.

When figuring allowable catch-up contributions, combine all catch-up contributions made by your employer on your behalf to the following plans.

• Qualified retirement plans. (To determine if your plan is a qualified plan, ask your plan administrator.)
• 403(b) plans.
• Simplified employee pension (SEP) plans.
• SIMPLE plans.

You can use Worksheet C in chapter 9 to figure your limit on catch-up contributions.

7. 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.

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 annual addition, or
• Excess elective deferral.

Excess Annual Addition

An excess annual addition is a contribution that is more than your limit on annual additions. To determine your limit on annual additions, see chapter 3 (chapter 5 for ministers or church employees).

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.

Excise Tax

If your 403(b) account invests in mutual funds, and you exceed your limit on annual additions, 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. See chapter 8 for a discussion on permissible distributions.

You cannot deduct the excise tax.

Reporting requirement.

Excess Elective Deferral

An excess elective deferral is the amount that is more than your limit on elective deferrals. To determine your limit on elective deferrals, see chapter 4.

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 not attributable to Roth contributions.

If the excess deferral is distributed by 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.

Tax treatment of excess deferrals attributable to Roth contributions.

For these rules, see Regulations section 1.402(g)-1(e).

8. Distributions and Rollovers

Distributions

Permissible distributions.

Generally, a distribution cannot be made from a 403(b) account until the employee:

• Reaches age 59½,
• Has a severance from employment,
• Dies,
• Becomes disabled,
• In the case of salary reduction contributions, encounters financial hardship, or
• Has a qualified reservist distribution.

In most cases, the payments you receive or that are made available to you under your 403(b) account are taxable in full as ordinary income. In general, the same tax rules apply to distributions from 403(b) plans that apply to distributions from other retirement plans. These rules are explained in Publication 575. Publication 575 also discusses the additional tax on early distributions from retirement plans.

Retired public safety officers.

Distribution for active reservist.

The 10% penalty for early withdrawal will not apply to a qualified reservist distribution attributable to elective deferrals from a 403(b) plan. A qualified reservist distribution is a distribution that is made:

• To an individual who is a reservist or national guardsman and who was ordered or called to active duty for a period in excess of 179 days or for an indefinite period; and
• During the period beginning on the date of the order or call to duty and ending at the close of the active duty period.

Minimum Required Distributions

You must receive all, or at least a certain minimum, of your interest accruing after 1986 in the 403(b) plan by April 1 of the calendar year following the later of the calendar year in which you become age 70½, or the calendar year in which you retire.

Temporary waiver of the minimum required distribution.

For calendar year 2009, there is a temporary waiver of the minimum required distribution from a 403(b) plan. Generally, you are not required to take a minimum distribution from your 403(b) plan in 2009. However, if your required beginning date was April 1, 2009, because you reached 70½ in 2008, you should have taken the required minimum distribution in 2009. If you reach age 70½ in 2009, you are not required to take a minimum required distribution from your 403(b) plan by April 1, 2010. Your first required distribution must be made by December 31, 2010. For more information see section 401(a)(9)(H).

Distributions in calendar year 2009 resulting from the temporary waiver.

No Special 10-Year Tax Option

A distribution from a 403(b) plan does not qualify as a lump-sum distribution. This means you cannot use the special 10-year tax option to calculate the taxable portion of a 403(b) distribution. For more information, see Publication 575.

Transfer of Interest in 403(b) Contract

Contract exchanges.

If you transfer all or part of your interest from a 403(b) contract to another 403(b) contract (held in the same plan), the transfer is tax free, and is referred to as a contract exchange. This was previously known as a 90-24 transfer. A contract exchange is similar to a 90-24 transfer with one major difference. Previously, you were able to accomplish the transfer without your employer’s involvement. After September 24, 2007, all such transfers are accomplished through a contract exchange requiring your employer’s involvement. In addition, the plan must provide for the exchange and the transferred interest must be subject to the same or stricter distribution restrictions. Finally, your accumulated benefit after the exchange must be equal to what it was before the exchange. Transfers that do not satisfy this rule are plan distributions and are generally taxable as ordinary income.

Plan-to-plan transfers.

You may also transfer part or all of your interest from a 403(b) plan to another 403(b) plan if you are an employee (or were formerly employed) by the employer of the plan to which you would like to transfer. Both the initial plan and the receiving plan must provide for transfers. Your accumulated benefit after the transfer must be at least equal to what it was before the transfer. The new plan’s restrictions on distributions must be the same or stricter than those of the original plan.

Tax-free transfers for certain cash distributions.

A tax-free transfer may also apply to a cash distribution of your 403(b) account from an insurance company that is subject to a rehabilitation, conservatorship, insolvency, or similar state proceeding. To receive tax-free treatment, you must do all of the following:

• Withdraw all the cash to which you are entitled in full settlement of your contract rights or, if less, the maximum permitted by the state.
• Reinvest the cash distribution in a single policy or contract issued by another insurance company or in a single custodial account subject to the same or stricter distribution restrictions as the original contract not later than 60 days after you receive the cash distribution.
• Assign all future distribution rights to the new contract or account for investment in that contract or account if you received an amount that is less than what you are entitled to because of state restrictions.

• The gross amount of cash distributed under the old contract.
• The amount of cash reinvested in the new contract.
• Your investment in the old contract on the date you receive your first cash distribution.

1. A copy of the statement you gave the new insurer.
2. A statement that includes:
   1. The words ELECTION UNDER REV. PROC. 92-44,
   2. The name of the company that issued the new contract, and
   3. The new policy number.

Direct trustee-to-trustee transfer.

If you make a direct trustee-to-trustee transfer, from your governmental 403(b) account to a defined benefit governmental plan, it may not be includible in gross income. The transfer amount is not includible in gross income if it is made to:

• Purchase permissive service credits, or
• Repay contributions and earnings that were previously refunded under a forfeiture of service credit under the plan, or under another plan maintained by a state or local government employer within the same state.

After-tax contributions.

For distributions beginning after December 31, 2006, after-tax contributions can be rolled over between a 403(b) plan and a defined benefit plan, IRA, or a defined contribution plan. If the rollover is to or from a 403(b) plan, it must occur through a direct trustee-to-trustee transfer.

Permissive service credit.

A permissive service credit is credit for a period of service recognized by a defined benefit governmental plan, only if you voluntarily contribute to the plan an amount that does not exceed the amount necessary to fund the benefit attributable to the period of service and the amount contributed is in addition to the regular employee contribution, if any, under the plan. Permissive service credit may also include service credit for up to 5 years where there is no performance of service, or service credited to provide an increased benefit for service credit which a participant is receiving under the plan. Check with your plan administrator as to the type and extent of service that may be purchased by this transfer.

Tax-Free Rollovers

You can generally roll over tax free all or any part of a distribution from a 403(b) plan to a traditional IRA or a non-Roth eligible retirement plan, except for any nonqualifying distributions, described on this page. You may also roll over any part of a distribution from a 403(b) plan by converting it through a direct rollover, described on this page, to a Roth IRA. Conversion amounts are generally includible in your taxable income in the year of the distribution from your 403(b) account. See Publication 590 for more information about conversion into a Roth IRA.

Hardship exception to rollover rules.

1. Whether errors were made by the financial institution;
2. Whether you were unable to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error;
3. Whether you used the amount distributed (for example, in the case of payment by check, whether you cashed the check); and
4. How much time has passed since the date of distribution.

Rollovers to and from 403(b) plans.

Eligible retirement plans.

The following are considered eligible retirement plans.

• Individual retirement arrangements.
• Roth IRA.
• Qualified retirement plans. (To determine if your plan is a qualified plan, ask your plan administrator.)
• 403(b) plans.
• Government eligible 457 plans.

Nonqualifying distributions.

You cannot roll over tax free:

• Minimum distributions (generally required to begin at age 70½). However, see Distributions in calendar year 2009 resulting from the temporary waiver, on page 13.
• Substantially equal payments over your life or life expectancy,
• Substantially equal payments over the joint lives or life expectancies of your beneficiary and you,
• Substantially equal payments for a period of 10 years or more,
• Hardship distributions, or
• Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or excess annual additions and any allocable gains.

Rollover of nontaxable amounts.

You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another eligible retirement plan, traditional IRA, or Roth IRA. The transfer must be made either through a direct rollover to an eligible plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional IRA or Roth IRA. If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution.

Direct rollovers of 403(b) plan distributions.

You have the option of having your 403(b) plan make the rollover directly to a traditional IRA, Roth IRA, or new plan. Before you receive a distribution, your plan will give you information on this. It is generally to your advantage to choose this option because your plan will not withhold tax on the distribution if you choose it.

Distribution received by you.

If you receive a distribution that qualifies to be rolled over, you can roll over all or any part of the distribution. Generally, you will receive only 80% of the distribution because 20% must be withheld. If you roll over only the 80% you receive, you must pay tax on the 20% you did not roll over. You can replace the 20% that was withheld with other money within the 60-day period to make a 100% rollover.

Voluntary deductible contributions.

For tax years 1982 through 1986, employees could make deductible contributions to a 403(b) plan under the individual retirement arrangement (IRA) rules instead of deducting contributions to a traditional IRA. If you made voluntary deductible contributions to a 403(b) plan under these traditional IRA rules, the distribution of all or part of the accumulated deductible contributions may be rolled over assuming it otherwise qualifies as a distribution you can roll over. Accumulated deductible contributions are the deductible contributions plus income and gain allocable to the contributions, minus expenses and losses allocable to the contributions, and minus distributions from the contributions, income, or gain.

Excess employer contributions.

The portion of a distribution from a 403(b) plan transferred to a traditional IRA that was previously included in income as excess employer contributions (discussed earlier) is not an eligible rollover distribution. Its transfer does not affect the rollover treatment of the eligible portion of the transferred amounts. However, the ineligible portion is subject to the traditional IRA contribution limits and may create an excess IRA contribution subject to a 6% excise tax (see chapter 1 of Publication 590).

Qualified domestic relations order.

Spouses of deceased employees.

If you are the spouse of a deceased employee, you can roll over the qualifying distribution attributable to the employee. You can make the rollover to any eligible retirement plan. If after you roll over money and other property from a 403(b) plan to an eligible retirement plan, and you take a distribution from that plan, you will not be eligible to receive the capital gain treatment or the special averaging treatment for the distribution.

Second rollover.

Nonspouse beneficiary.

A nonspouse beneficiary may make a direct rollover of a distribution from a 403(b) plan of a deceased participant if the rollover is a direct transfer to an inherited IRA established to receive the distribution. If the rollover is a direct trustee-to-trustee transfer to an IRA established to receive the distribution:

• The transfer will be treated as an eligible rollover distribution.
• The IRA will be considered an inherited account.
• The required minimum distribution rules that apply in instances where the participant dies before the entire interest is distributed will apply to the transferred IRA.

Frozen deposits.

The 60-day period usually allowed for completing a rollover is extended for any time that the amount distributed is a frozen deposit in a financial institution. The 60-day period cannot end earlier than 10 days after the deposit ceases to be a frozen deposit. A frozen deposit is any deposit that on any day during the 60-day period cannot be withdrawn because:

1. The financial institution is bankrupt or insolvent, or
2. The state where the institution is located has placed limits on withdrawals because one or more banks in the state are (or are about to be) bankrupt or insolvent.

Gift Tax

If, by choosing or not choosing an election, or option, you provide an annuity for your beneficiary at or after your death, you may have made a taxable gift equal to the value of the annuity.

Joint and survivor annuity.

If the gift is an interest in a joint and survivor annuity where only you and your spouse have the right to receive payments, the gift will generally be treated as qualifying for the unlimited marital deduction.

More information.

9. Worksheets

Chapter 2 introduced you to the term maximum amount contributable (MAC). Generally, your MAC is the lesser of your:

• Limit on annual additions (chapter 3), or
• Limit on elective deferrals (chapter 4).

The worksheets in this chapter can help you figure the cost of incidental life insurance, your includible compensation, your limit on annual additions, your limit on elective deferrals, your limit on catch-up contributions, and your maximum amount contributable.

If your compensation is the same as, or more than, the projected amounts and the calculations are correct, then you should simply file these worksheets with your other tax records for the year.

If your compensation was lower than your estimated figures, you will need to check the amount contributed during the year to determine if contributions are more than your MAC.

When Should I Figure MAC?

At the beginning of each year, you should figure your MAC using a conservative estimate of your compensation. Should your income change during the year, you should refigure your MAC based on a revised conservative estimate. By doing this, you will be able to determine if contributions to your 403(b) account should be increased or decreased for the year.

Figuring MAC for the Current Year

If you are figuring your MAC for the current year, you should use a conservative estimate of your compensation.

Checking the Previous Year's Contributions

At the beginning of the following year, you should refigure your MAC based on your actual earned income.

At the end of the current year or the beginning of the next year, you should check your contributions to be sure you did not exceed your MAC. This means refiguring your limit based on your actual compensation figures for the year. This will allow you to determine if the amount contributed is more than the allowable amounts, and possibly avoid additional taxes.

Available Worksheets

The following worksheets have been provided to help you figure your MAC.

• Worksheet A. Cost of Incidental Life Insurance.
• Worksheet B. Includible Compensation for Your Most Recent Year of Service.
• Worksheet C. Limit on Catch-Up Contributions.
• Worksheet 1. Maximum Amount Contributable (MAC).

Worksheet A. Cost of Incidental Life Insurance

Worksheet B. Includible Compensation for Your Most Recent Year of Service¹

Worksheet C. Limit on Catch-Up Contributions

Worksheet 1. Maximum Amount Contributable (MAC)

10. Retirement Savings Contributions Credit (Saver's Credit)

If you or your employer make eligible contributions (defined later) to a retirement plan, you may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). This credit could reduce the federal income tax you pay dollar for dollar.

Can you claim the credit?

If you or your employer make eligible contributions to a retirement plan, you can claim the credit if all of the following apply.

1. You are not under age 18.
2. You are not a full-time student (explained below).
3. No one else, such as your parent(s), claims an exemption for you on their tax return.
4. Your adjusted gross income (defined later) is not more than:
   1. $55,500 for 2009 (unchanged for 2010) if your filing status is married filing jointly,
   2. $41,625 for 2009 (unchanged for 2010) if your filing status is head of household (with qualifying person), or
   3. $27,750 for 2009 (unchanged for 2010) if your filing status is single, married filing separately, or qualifying widow(er) with dependent child.

Full-time student.

You are a full-time student if, during some part of each of 5 calendar months (not necessarily consecutive) during the calendar year, you are either:

• A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or
• A student taking a full-time, on-farm training course given by either a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or a state, county, or local government.

You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full-time.

Adjusted gross income.

• Foreign earned income,
• Foreign housing costs,
• Income for bona fide residents of American Samoa, and
• Income from Puerto Rico.

Eligible contributions.

These include:

1. Contributions to a traditional or Roth IRA,
2. Salary reduction contributions (elective deferrals, including amounts designated as after-tax Roth contributions) to:
   1. A 401(k) plan (including a SIMPLE 401(k)),
   2. A section 403(b) annuity,
   3. An eligible deferred compensation plan of a state or local government (a governmental 457 plan),
   4. A SIMPLE IRA plan, or
   5. A salary reduction SEP, and
3. Contributions to a section 501(c)(18) plan.

They also include voluntary after-tax employee contributions to a tax-qualified retirement plan or a section 403(b) annuity. For purposes of the credit, an employee contribution will be voluntary as long as it is not required as a condition of employment.

Reducing eligible contributions.

Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (defined later) from any IRA, plan, or annuity included above under Eligible contributions. Also reduce your eligible contributions by any distribution from a Roth IRA that is not rolled over, even if the distribution is not taxable. Do not reduce your eligible contributions by any of the following:

1. The portion of any distribution which is not includible in income because it is a trustee-to-trustee transfer or a rollover distribution.
2. Any distribution that is a return of a contribution to an IRA (including a Roth IRA) made during the year for which you claim the credit if:
   1. The distribution is made before the due date (including extensions) of your tax return for that year,
   2. You do not take a deduction for the contribution, and
   3. The distribution includes any income attributable to the contribution.
3. Loans from a qualified employer plan treated as a distribution.
4. Distributions of excess contributions or deferrals (and income attributable to excess contributions and deferrals).
5. Distributions of dividends paid on stock held by an employee stock ownership plan under section 404(k).
6. Distributions from an eligible retirement plan that are converted or rolled over to a Roth IRA.
7. Distributions from a military retirement plan.

Distributions received by spouse.

Any distributions your spouse receives are treated as received by you if you file a joint return with your spouse both for the year of the distribution and for the year for which you claim the credit.

Testing period.

The testing period consists of:

• The year in which you claim the credit,
• The 2 years before the year in which you claim the credit, and
• The period after the end of the year in which you claim the credit and before the due date of the return (including extensions) for filing your return for the year in which you claimed the credit.

Maximum eligible contributions.

After your contributions are reduced, the maximum annual contribution on which you can base the credit is $2,000 per person.

Effect on other credits.

The amount of this credit will not change the amount of your refundable tax credits. A refundable tax credit, such as the earned income credit or the additional child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes.

Maximum credit.

This is a nonrefundable credit. The amount of the credit in any year cannot be more than the amount of tax that you would otherwise pay (not counting any refundable credits or the adoption credit) in any year. If your tax liability is reduced to zero because of other nonrefundable credits, such as the education credits, then you will not be entitled to this credit.

How to figure and report the credit.