403b Contribution Rules

In this article, we're going to be discussing 403b contribution rules. Our discussion is going to include elective deferrals, after-tax contributions, and maximum allowable contributions. We'll also run through some of the contribution rules that are unique to 403b plans, such as the 15-year rule.

There are only two sources of money that can be directed to your 403b account: a salary reduction agreement, or an employer making contributions directly to the fund itself.  Even though you might be able to establish the contribution rules for your particular 403b plan, only your employer can make the actual contributions to your 403b account.  You cannot make direct deposits into this kind of retirement plan.

Contributions to 403b Accounts

This last point is subtle, but it's also an important one.  Unlike a Roth IRA plan, you cannot wake up one day and decide to contribute $3,000 to your 403b.  The money has to come out of your paycheck each week, and your employer establishes your account payments based on your instructions.

That being said, there are three distinct ways to contribute to a 403b plan, plus you can use any combination of the below methods:

Elective Deferrals

Elective deferrals are contributions you make under a salary-reduction agreement.  This agreement allows your employer to withhold money from your paycheck to be contributed to your 403b account.  Elective deferrals are not taxed until withdrawn from the account.

Non-Elective Contributions

Non-elective contributions are employer contributions, and do not require a salary-reduction agreement.  These can include matching contributions, discretionary contributions, and even mandatory contributions to the employee's account as part of the overall contribution rules or policies established by the plan.  As was the case with elective deferrals, non-elective contributions are not taxable until withdrawn.

After-Tax Contributions

The final way that contributions can be made to a 403b account is through after-tax contributions.  If your plan allows this type of contribution, then these are salary payments taken from your paycheck on an after-tax basis.  You cannot deduct this type of contribution from your federal income taxes, however upon withdrawal, the taxed portion of the contribution will not be taxed again (but any appreciation, or growth, of this contribution over time will be taxed).

Annual Contributions to 403b Accounts

There are limits to the contributions you can make to your 403b account each year.  If you contribute too much to your account, then certain tax penalties may apply.  Normally, your program administrator will automatically prevent you from over-funding your account, thereby shielding you from any penalty.

Maximum Allowable Contributions or MAC

In general, you need to take into consideration two components of your maximum allowable contribution, or MAC, to understand what contribution limits may apply in a given year.  Those two components include your limit on annual additions (those you and others make to your account), and your limits on elective deferrals (contributions from your paycheck).

The limit that applies to your individual situation depends on the types of contributions made to your account each year.  In general, the contribution limit to your 403b will be the lesser of your limit on annual additions, or your limit on elective deferrals.

Only Elective Deferrals

If the only contributions made to your 403b were elective deferrals, then you will need to calculate both of the limits mentioned above.  Your MAC will be the lower of the two limits calculated.

Only Non-Elective Contributions

If the only contributions made to your 403b account were non-elective contributions (employer contributions to your account), then your MAC will be determined by calculating your limit on annual additions.

Elective and Non-Elective Contributions

If contributions to your 403b account include both elective and non-elective contributions, then you will need to calculate both limits, however, your MAC is the limit on annual additions.

Calculating Your MAC

You should calculate your MAC each year based on your actual compensation.  It is advisable to use a conservative estimate of your compensation when calculating your MAC.  If your compensation should change during the calendar year, then you can recalculate a new MAC based on this better information.

Annual Additions

The first component of the MAC calculation is your limit on annual additions.  This is the limit on all contributions to your 403b account, and includes:

• Elective Deferrals
• Non-Elective Contributions
• After-Tax Contributions

The limit in 2011 for annual additions was the smaller of $49,000 or 100% of your includable compensation.  In 2012, the limit for annual additions increases to $50,000 or 100% of your includable compensation.  In 2013, this limit will be indexed for inflation and can move up in $1,000 increments.

Elective Deferrals

The 2011 limit on elective deferrals to your 403b was $16,500.  In 2012, this contribution limit increased to $17,000.  In 2013, the limit can move up in $500 increments based on a measure of inflation.  There is, however, one exception to this guideline that is known as the 15-Year Rule. 

15-Year Rule

If you have at least 15 years of service, then the limit on your elective deferrals, or contributions, to your 403b is increased by the lower of:

1. $3,000
2. $15,000 - reduced by the increases to the limit you were allowed in earlier years because of the 15-year rule.
3. $5,000 times the number of years of service you have with the organization minus the total elective deferrals made by your employer in earlier years

If you happen to qualify for the 15-year rule, then your elective deferrals under this limit can be as high as $19,500 in 2011 and $20,000 in 2012.  Once again, that number should move higher in 2013.

Catch-Up Contributions

Finally, if you reach the age of 50 or older by the end of any calendar year, then you may be eligible to make additional catch-up contributions to your 403b account.  You cannot make catch up contributions with after-tax contributions, and the maximum catch-up contribution you can make in 2011 is $5,500, or your includable compensation minus your other elective deferrals for the year.  In 2012, the limit remains the same at $5,500.

In 2013, the rule for catch-up contributions is similar to the ones mentioned earlier.  Catch-up contributions can be indexed to inflation, and will move up in $500 increments.  Keep in mind that catch-up contributions are not used when calculating your MAC.  This means the maximum you are allowed to contribute to your 403b account is your catch-up contribution plus your MAC.

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