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403(b) Plans:
Contributions A 403(b) account may receive the following types of contributions:
-
Elective deferral contributions, which are deducted from employee
paychecks on a pretax basis.
- Employer
contributions, which can be fixed or discretionary.
- After-tax
contributions, which are deducted from employee paychecks on an after-tax
basis.
- A combination
of any of the three contribution types listed above.
Employer
Contribution Limit
To the overall plan, an organization may contribute up to 100 percent of the
aggregate compensation paid to eligible employees. Say five eligible employees
earn compensation as follows:
|
Jane -
Jill -
June -
Aggregate - |
$ 50,000
$ 40,000
$ 20,000
$110,000 |
The organization
may contribute from $-0- to $110,000 to the overall plan, but no employee may
receive contributions in excess of 100 percent of his or her compensation or
$40,000, whichever is less. For this purpose of determining an employee's
contribution limit, any employee's compensation in excess of $200,000, which is
referred to as the compensation cap, is not considered.
Contribution Formulas
An employer may chose among several formulas to calculate contribution
allocations:
- Pro-rata -
This formula results in each eligible employee receiving the same percentage
of his or her eligible compensation.
- Social
security integration - This formula awards higher-paid employees with a larger
percentage of their compensation. The employer assigns to the 403(b) plan an
amount that is a percentage of the accumulated total of all eligible
employees' compensation. Using a special formula, the employer then allocates
a contribution percentage to each eligible employee. The allocation must be
done according to specific IRS-provided requirements; otherwise, the plan may
be disqualified.
Deferral Contribution Limits
An employee may elect to defer 100 percent of compensation up to the
dollar limit for that year (see chart below):
| Tax
Year |
Elective deferral contribution limit |
| 2004 |
$13,000 |
| 2005 |
$14,000 |
| 2006 and after |
$15,000 plus cost of living
adjustments (COLA) increases |
Deferral
contributions in excess of these limits are excess deferrals, which must be
removed from the employee's 403(b) plan account within certain time frames.
Excess contributions require special administrative handling and will be
assessed penalties if not removed within these time frames.
Eligible
employees who are at least age 50 by the end of the year may make additional
contributions, which are referred to as "catch-up contributions." The catch-up
contribution limits for different tax years are as follows:
| Tax
Year |
Catch-up contribution limit
(for eligible employees age 50 and older) |
| 2004 |
$3,000 |
| 2005 |
$4,000 |
| 2006 and after |
$5,000 plus cost of living
adjustments (COLA) increases |
The combined
elective deferral and employer contribution cannot exceed $40,000 (plus catch-up
contributions).
Note: Employees
with 15 years of service, to whom special rule apply, must consult with their
employer regarding these special provisions and their availability.
Investment Options
The investment options for a 403(b) account are determined by the 403(b)
product:
- A 403(b)
annuity contract must invest in an annuity product provided through an
insurance company. The product may be a variable or fixed annuity contract
- A custodial
account, which is provided through a retirement account custodian, must invest
in regulated investment companies, such as mutual funds.
- A retirement
income account may invest in vehicles such as annuities and publicly-traded
securities. Only churches and church-related organizations may establish
retirement income accounts.
Generally,
employees are allowed to select investments within the parameters stated above.
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Distributions
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