403(B)Exclusion Allowance

[Guest Foster]

I'm trying to correctly calculate the exclusion allowance for a person who only will work a partial year. Is the formula supposed to be calculated with an annualized salary, or the pro-rated salary that the person will actually receive?

[Guest mike webb]

Depends on the component of the formula. The maximum amount that a particpant may voluntarily defer (contribute) is generally the lesser of: 1) 402(g) limit 2) elective deferral portion of 415 limit 3) elective deferral poriton of 403(B)(2) exclusion allowance.

The 402(g) limit ($10,500 in 2000; can be increased up to $13,500 if participant has completed at least 15 years of service with a "qualified organization") is a calendar year limit. Furthermore, since there is one 402(g) limit regardless of the number of employers or plans involved, if your employee is planning on working with a different employer for the remainder of the year, any elective deferrals to that employer's plan would need to be aggregated for 415 limit purposes.

The 415 limit component (generally, 25% of compensation, less employer contributions, if any)is also generally a calendar year limit (though technically the employee may change the calculation year by attaching a statement to his/her income tax return).The compensation used would not be annualized; it would be the actual compensation paid for the year in question. For example, if the employee works for Employer A from 1/1/00-3/31/00, and is paid $10,000 for that period of time, his/her maximum voluntary contribution under the 415 limit is 25% of $10,000, or $2,500, less employer contributions (if any). Note that, although Section 403(B) contributions with all employers must be taken into account for 415 limit purposes, in practice such a limitation does not often come into play due to the fact that the 415 limit is largely a percentage limit (though there is an overall $30,000 cap on combined employer/employee contributions).

The 403(B)(2) exclusion allowance component (expressed in greatly simplified form as 20% of compensation times years of service, less the sum of all prior years' contributions and current-year employer contributions (if any))utilizes compensation earned over the particpant's most recent one-year period of service. For full-time employees, this calculation is relatively strightforward; in our example of a participant who worked from 1/1/2000-3/31/2000, we would utilize the compensation earned from 4/1/1999-3/31/2000. For part-time employees, the calculation of compensation becomes a bit complicated, as part-time service periods would have to be accumulated until an full-time equivalent of one year of service was reached. This may result in reaching back several years just to obtain the compensation for the most recent one-year period of service!

If your employee is being limited by a particular component of the maximum contribution calculation, he/she may be able to take advantage of certain Special Elections to increase the amount of his/her contribution, provided that he/she works for a "qualified organization" (schools, churches, hospitals, home health service agencies and health and welfare agencies are "qualified"; museums, foundations and other 501©(3)'s are not) Details are provided elsewhere on this message board.

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Mike W.