IRS Releases Publication 571 (1/2017), Tax-Sheltered Annuity Plans (403(B) Plans)

Future Developments

For the latest information about developments related to Pub. 571, such as legislation enacted after it was published, go to http://www.irs.gov/pub571.

What's New for 2016

Retirement savings contributions credit. For 2016, the adjusted gross income limitations have increased from $61,000 to $61,500 for married filing jointly filers, from $45,750 to $46,125 for head of household filers, and from $30,500 to $30,750 for single, married filing separately, or qualifying widow(er) with dependent child filers. See chapter 10, Retirement Savings Contributions Credit (Saver's Credit), for additional information.

Limit on elective deferrals. For 2016, the limit on elective deferrals remains unchanged at $18,000.

Limit on annual additions. For 2016, the limit on annual additions remains unchanged at $53,000.

Self certification available for missed rollover deadline. Beginning August 24, 2016, if you inadvertently fail to complete the rollover of a distribution from an IRA or employer qualified retirement plan within 60 days, you may be able to obtain a waiver of the 60-day time limit through a self-certification procedure if you meet certain requirements. For more information, see How do you self-certify that you qualify for a waiver? under Tax-Free Rollovers in chapter 8.

What's New for 2017

Retirement savings contributions credit. For 2017, the adjusted gross income limitations have increased from $61,500 to $62,000 for married filing jointly filers, from $46,125 to $46,500 for head of household filers, and from $30,750 to $31,000 for single, married filing separately, or qualifying widow(er) with dependent child filers. See chapter 10, Retirement Savings Contributions Credit (Saver's Credit), for additional information.

Limit on elective deferrals. For 2017, the limit on elective deferrals remains unchanged at $18,000.

Limit on annual additions. For 2017, the limit on annual additions has increased from $53,000 to $54,000.

Reminder

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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 do the following.

Chapter 1 answers questions frequently asked by 403(b) plan participants.

Chapters 2 through 6 explain the rules and terms you need to know to figure the maximum amount that could have been contributed to your 403(b) account for 2016 and the maximum amount that can be contributed to your 403(b) account in 2017.

Chapter 7 provides general information on the prevention and correction of excess contributions to your 403(b) account.

Chapter 8 provides general information on distributions, transfers, and rollovers.

Chapter 9 provides blank worksheets that you will need to accurately and actively participate in your 403(b) plan. Filled-in samples of most of these worksheets can be found throughout this publication.

Chapter 10 explains the rules for claiming the retirement savings contributions credit (saver's credit).

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Useful Items

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Publication

This chapter introduces you to 403(b) plans and accounts. Specifically, the chapter answers the following questions.

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.

What Are the Benefits of Contributing to a 403(b) Plan?

There are three benefits to contributing to a 403(b) plan.

Deducted. If an amount is deducted from your income, it is included with your other wages on your Form W-2. You report this amount on your tax return, but you are allowed to subtract it when figuring the amount of income on which you must pay tax.

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.

Example. A minister employed as a chaplain by a state-run prison and a chaplain in the United States Armed Forces are eligible employees because their employers aren't section 501(c)(3) organizations and they are employed as ministers.

Universal Availability. Generally, all eligible employees (with certain exceptions) of an employer must be permitted to make elective deferrals (including Roth elective deferrals) if any employee of the employer may make elective deferrals. If your employer offers a 403(b) plan, you should have received information about your eligibility to participate.

Who Can Set Up a 403(b) Account?

You can't set up your own 403(b) account. Only employers can set up 403(b) accounts. A self-employed minister can't 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.

Do I Report Contributions on My Tax Return?

Generally, you don't report contributions to your 403(b) account (except Roth contributions) on your tax return. Your employer will report contributions on your 2016 Form W-2. Elective deferrals will be shown in box 12 with code E for pre-tax amounts and code BB for Roth amounts, 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. If you are a self-employed minister, you must report the total contributions as a deduction on your tax return. Deduct your contributions on line 28 of the 2016 Form 1040.

Chaplains. If you are a chaplain and your employer doesn't exclude contributions made to your 403(b) account from your earned income, you may be able to take a deduction for those contributions on your tax return.

However, if your employer has agreed to exclude the contributions from your earned income, you won't be allowed a deduction on your tax return.

If you can take a deduction, include your contributions on line 36 of the 2016 Form 1040. Enter the amount of your deduction and write "403(b)" on the dotted line next to line 36.

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 how to prevent excess contributions and how 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:

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

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

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. If the contributions made to your 403(b) account were a combination of both elective deferrals made under a salary reduction agreement and nonelective contributions (employer contributions not made under a salary reduction agreement), you will need to figure both limits. Your MAC is the limit on the annual additions.

Catch-up contributions. If you are age 50 or older, you may be able to make additional catch-up contributions, which are explained in chapter 6.

You need to figure the limit on elective deferrals to determine if you have excess elective deferrals, which are explained in chapter 7.

Worksheets. Worksheets are available in chapter 9 to help you figure your MAC.

When Should I Figure My MAC?

At the beginning of 2017, you should refigure your 2016 MAC based on your actual compensation for 2016. This will allow you to determine if the amount that has been contributed to your 403(b) account for 2016 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:

Ministers and church employees. If you are a minister or a church employee, you may be able to increase your limit on annual additions or use different rules when figuring your limit on annual additions. For more information, see chapter 5.

Participation in a qualified plan. If you participated in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pensions of all corporations, partnerships, and sole proprietorships in which you have more than 50% control to determine the total annual additions.

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

Includible Compensation for Your Most Recent Year of Service

Definition. Generally, includible compensation for your most recent year of service is the amount of taxable wages and benefits you received from the employer that maintained a 403(b) account for your benefit during your most recent year of service.

When figuring your includible compensation for your most recent year of service, keep in mind that your most recent year of service may not be the same as your employer's most recent annual work period. This can happen if your tax year isn't the same as your employer's annual work period.

When figuring includible compensation for your most recent year of service, don't mix compensation or service of one employer with compensation or service of another employer.

Most Recent Year of Service

Your most recent year of service is your last full year of service, ending on the last day of your tax year that you worked for the employer that maintained a 403(b) account on your behalf.

Tax year different from employer's annual work period. If your tax year isn't the same as your employer's annual work period, your most recent year of service is made up of parts of at least two of your employer's annual work periods.

Example. A professor who reports her income on a calendar-year basis is employed on a full-time basis by a university that operates on an academic year (October through May). To figure her includible compensation for 2016, the professor's most recent year of service is her service from January through May 2016 and from October through December 2016.

Figuring Your Most Recent Year of Service

To figure your most recent year of service, begin by determining what is a full year of service for your position. A full year of service is equal to full-time employment for your employer's annual work period.

After identifying a full year of service, begin counting the service you have provided for your employer starting with the service provided in the current year.

Part-time or employed only part of the year. If you are a part-time or a full-time employee who is employed for only part of the year, your most recent year of service is your service this year and your service for as many previous years as is necessary to total 1 full year of service. To determine your most recent year of service, add the following periods of service.

Not yet employed for 1 year. If, at the close of the year, you haven't yet worked for your employer for 1 year (including time you worked for the same employer in all earlier years), use the period of time you have worked for the employer as your most recent year of service.

Includible Compensation

After identifying your most recent year of service, the next step is to identify the includible compensation associated with that full year of service.

Includible compensation isn't the same as income included on your tax return. Compensation is a combination of income and benefits received in exchange for services provided to your employer.

Generally, includible compensation is the amount of income and benefits:

Contributions after retirement. Nonelective contributions may be made for an employee for up to 5 years after retirement. These contributions would be based on includible compensation for the last year of service before retirement.

Cost of Incidental Life Insurance

Includible compensation doesn't include the cost of incidental life insurance.

CAUTION: If all of your 403(b) accounts invest only in mutual funds, then you have no incidental life insurance.

If you have an annuity contract, a portion of the cost of that contract may be for incidental life insurance. If so, the cost of the insurance is taxable to you in the year contributed and is considered part of your basis when distributed. Your employer will include the cost of your insurance as taxable wages in box 1 of Form W-2.

Not all annuity contracts include life insurance. Contact your plan administrator to determine if your contract includes incidental life insurance. If it does, you will need to figure the cost of life insurance each year the policy is in effect.

Figuring the cost of incidental life insurance. If you have determined that part of the cost of your annuity contract is for an incidental life insurance premium, you will need to determine the amount of the premium and subtract it from your includible compensation.

To determine the amount of the life insurance premiums, you will need to know the following information.

Example. Your new contract provides that your beneficiary will receive $10,000 if you should die before retirement. Your cash value in the contract at the end of the first year is zero. Your current life insurance protection for the first year is $10,000 ($10,000 - 0).

The cash value in the contract at the end of year two is $1,000, and the current life insurance protection for the second year is $9,000 ($10,000 - $1,000).

The 1-year cost of the protection can be calculated by using Figure 3-1. The premium rate is determined based on your age on your birthday nearest the beginning of the policy year.

Figure 3-1. Table of One-Year Term Premiums for $1,000 Life Insurance Protection

 Age       Cost

Example 1. Lynne Green, age 44, and her employer enter into a 403(b) plan that will provide her with a $500 a month annuity upon retirement at age 65. The agreement also provides that if she should die before retirement, her beneficiary will receive the greater of $20,000 or the cash surrender value in the life insurance contract. Using the facts presented, we can determine the cost of Lynne's life insurance protection as shown in Table 3-1.

Lynne's employer has included $28 for the cost of the life insurance protection in her current year's income. When figuring her includible compensation for this year, Lynne will subtract $28.

Table 3-1. Worksheet A. Cost of Incidental Life Insurance

 Note. Use this worksheet to figure the cost of

In year two, Lynne's employer will include $29.07 in her current year's income. Lynne will subtract this amount when figuring her includible compensation.

Table 3-2. Worksheet A. Cost of Incidental Life Insurance

 Note. Use this worksheet to figure the cost of

You can use Worksheet B in chapter 9 to determine your includible compensation for your most recent year of service.

Example. Floyd has been periodically working full-time for a local hospital since September 2014. He needs to figure his limit on annual additions for 2017. The hospital's normal annual work period for employees in Floyd's general type of work runs from January to December.

During the periods that Floyd was employed with the hospital, the hospital has always been eligible to provide a 403(b) plan to employees. Additionally, the hospital has never provided the employees with a 457 deferred compensation plan, a transportation fringe benefit plan, or a cafeteria plan.

Floyd has never worked abroad and there is no life insurance provided under the plan.

Table 3-3 shows the service Floyd provided to his employer, his compensation for the periods worked, his elective deferrals, and his taxable wages.

Table 3-3. Floyd's Compensation

 Note. This table shows information Floyd will

Because Floyd isn't planning to work the entire 2017 year, his most recent year of service will include the time he is planning to work in 2017 plus time he worked in the preceding 3 years until the time he worked for the hospital totals 1 year. If the total time he worked is less than 1 year, Floyd will treat it as if it were 1 year. He figures his most recent year of service shown in the following list.

After figuring his includible compensation, Floyd determines his limit on annual additions for 2017 to be $54,000, the lesser of his includible compensation, $70,475 (Table 3-4), and the maximum amount of $54,000.

Table 3-4. Worksheet B. Includible Compensation for Your Most Recent Year of Service¹

 Note. Use this worksheet to figure includible compensation for your

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.

CAUTION: 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:

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 Pub. 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 isn't 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 $18,000 for 2016 and 2017. 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) and it is allowed by the terms of the plan document, the limit on elective deferrals to your 403(b) account is increased by the least of:

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.

For purposes of the 15-year rule, years of service are calculated through the year for which the calculation is being made. For example, to determine the limit for 2016, you count years of service through 2016.

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 can't 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 2012. She has always worked full-time for each annual work period. At the end of 2016, 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

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 can't 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.

  Number of months

  Number of hours per

Figure the first fraction as though you had worked full-time for part of the annual work period. The fraction is as follows.

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

    Number of hours Maria

  1       1       1

Example

Floyd has figured his limit on annual additions. The only other component needed before he can determine his MAC for 2017 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 isn't eligible for the special 15-year increase. Therefore, his limit on elective deferrals for 2017 is $18,000 as shown in Table 4-2.

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

Figuring Floyd's MAC

Floyd has determined that his limit on annual additions for 2017 is $54,000 and his limit on elective deferrals is $18,000. 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 2017 is $18,000, the lesser of both limits.

Table 42. Worksheet 1. Maximum Amount Contributable (MAC)

 Note. Use this worksheet to figure your MAC.

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:

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, even if your annual additions figured under the general rule is less.

Total contributions over your lifetime under this choice can't 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:

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

Foreign missionary. If you are a foreign missionary, your includible compensation includes foreign earned income that may otherwise be excludable from your gross income under section 911.

If you are a foreign missionary, and your adjusted gross income is $17,000 or less, contributions to your 403(b) account won't be treated as exceeding the limit on annual additions if the contributions aren't 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.

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 employee. 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 can't be made with after-tax employee contributions.

You are eligible to make catch-up contributions if:

CAUTION: If you are eligible for both the 15-year rule increase in elective deferrals and the age 50 catch-up, allocate amounts first under the 15-year rule and next as an age 50 catch-up.

TIP: Catch-up contributions aren't counted against your MAC. Therefore, the maximum amount that you are allowed to have contributed to your 403(b) account is your MAC plus your allowable catch-up contributions.

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

7. Excess Contributions

If your actual contributions (not including catch-up 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.

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 (not including catch-up contributions) to your account are greater than your MAC, you have excess contributions. 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 to prevent 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:

An excess annual addition is a contribution (not including catch-up contributions) 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.

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 doesn't 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 can't deduct the excise tax.

Reporting requirement. You must file Form 5330 if there has been an excess contribution to a custodial account and that excess hasn't been corrected.

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 isn't 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.

Note. When April 15 falls on a Saturday, Sunday, or legal holiday, a return is considered timely filed if filed on the next succeeding day that isn't a Saturday, Sunday, or legal holiday.

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.

Note. When April 15 falls on a Saturday, Sunday, or legal holiday, a return is considered timely filed if filed on the next succeeding day that isn't a Saturday, Sunday, or legal holiday.

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 can't be made from a 403(b) account until the employee:

Retired public safety officers. If you are an eligible retired public safety officer, distributions of up to $3,000, made directly from your 403(b) plan to pay accident, health, or long-term care insurance, aren't included in your taxable income. The premiums can be for you, your spouse, or your dependents.

A public safety officer is a law enforcement officer, fire fighter, chaplain, or member of a rescue squad or ambulance crew.

For additional information, see Pub. 575.

Distribution for active reservist. The 10% penalty for early withdrawals won't 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:

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 70 1/2, or the calendar year in which you retire.

TIP: Check with your employer, plan administrator, or provider to find out whether this rule also applies to pre-1987 accruals. If not, a minimum amount of these accruals must begin to be distributed by the later of the end of the calendar year in which you reach age 75 or April 1 of the calendar year following retirement. For each year thereafter, the minimum distribution must be made by the last day of the year. If you don't receive the required minimum distribution, you are subject to a nondeductible 50% excise tax on the difference between the required minimum distribution and the amount actually distributed.

No Special 10-Year Tax Option

A distribution from a 403(b) plan doesn't qualify as a lump-sum distribution. This means you can't use the special 10-year tax option to calculate the taxable portion of a 403(b) distribution. For more information, see Pub. 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 don't 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 of (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.

The transfer amount isn't includible in gross income if it is made to:

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 doesn't 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.

A 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 later. You may also roll over any part of a distribution from a 403(b) plan by converting it through a direct rollover, described below, 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 Pub. 590-A for more information about conversion into a Roth IRA.

Note. A participant is required to roll over distribution amounts received within 60 calendar days in order for the amount to be treated as nontaxable. Distribution amounts that are rolled over within the 60 days aren't subject to the 10% early distribution penalty.

Rollovers to and from 403(b) plans. You can generally roll over tax free all or any part of a distribution from an eligible retirement plan to a 403(b) plan. Beginning January 1, 2008, distributions from tax-qualified retirement plans and tax-sheltered annuities can be converted by making a direct rollover into a Roth IRA subject to the restrictions that currently apply to rollovers from a traditional IRA into a Roth IRA. Converted amounts are generally includible in your taxable income in the year of the distribution from your 403(b) account. See Pub. 590-A for more information on conversion into a Roth IRA.

If a distribution includes both pre-tax contributions and after-tax contributions, the portion of the distribution that is rolled over is treated as consisting first of pre-tax amounts (contributions and earnings that would be includible in income if no rollover occurred). This means that if you roll over an amount that is at least as much as the pre-tax portion of the distribution, you don't have to include any of the distribution in income.

For more information on rollovers and eligible retirement plans, see Pub. 575.

CAUTION: If you roll over money or other property from a 403(b) plan to an eligible retirement plan, see Pub. 575 for information about possible effects on later distributions from the eligible retirement plan.

Hardship exception to rollover rules. The IRS may waive the 60-day rollover period if the failure to waive such requirement would be against equity or good conscience, including cases of casualty, disaster, or other events beyond the reasonable control of an individual.

Ways to get a waiver of the 60-day rollover requirement. There are three ways to obtain a waiver of the 60-day rollover requirement:

How do you self-certify that you qualify for a waiver? Based on Revenue Procedure 2016-47, 2016-37 I.R.B. 346, available at http://www.irs.gov/irb/2016-37_IRB/ar09.html, you may make a written certification to a plan administrator or an IRA trustee that you missed the 60-day rollover contribution deadline because of one or more of the 11 reasons listed in Revenue Procedure 2016-47. A plan administrator or an IRA trustee may rely on the certification in accepting and reporting receipt of the rollover contribution. You may make the certification by using the model letter in the appendix to the revenue procedure or by using a letter that is substantially similar. There is no IRS fee for self certification. A copy of the certification should be kept in your files and be available if requested on audit.

For additional information on rollovers, see Pub. 590-A.

How do you apply for a waiver ruling and what is the fee? You can request a ruling according to the procedures outlined in Revenue Procedure 2003-16 and Revenue Procedure 2016-4. The appropriate user fee of $10,000 must accompany every request for a waiver of the 60-day rollover requirement (see the user fee chart in Revenue Procedure 2016-8).

How does the IRS determine whether to grant a waiver in a private letter ruling? In determining whether to issue a favorable letter ruling granting a waiver, the IRS will consider all of the relevant facts and circumstances, including:

For more information on waivers of the 60-day rollover requirement, go to http://www.irs.gov/retirement-plans/retirement-plans-faqs-relating-to-waivers-of-the-60-day-rollover-requirement.

Eligible retirement plans. The following are considered eligible retirement plans.

Nonqualifying distributions. You can't roll over tax free:

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 won't 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 didn't 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 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 if it otherwise qualifies as a distribution you can roll over. Accumulated deductible contributions are the deductible contributions:

Its transfer doesn't 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 Pub. 590-A).

Qualified domestic relations order. You may be able to roll over tax free all or any part of an eligible rollover distribution from a 403(b) plan that you receive under a qualified domestic relations order (QDRO). If you receive the interest in the 403(b) plan as an employee's spouse or former spouse under a QDRO, all of the rollover rules apply to you as if you were the employee. You can roll over your interest in the plan to a traditional IRA or another 403(b) plan. For more information on the treatment of an interest received under a QDRO, see Pub. 575.

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.

After you roll money and other property over from a 403(b) plan to an eligible retirement plan, and you take a distribution from that plan, you won't be eligible to receive the capital gain treatment or the special averaging treatment for the distribution.

Second rollover. If you roll over a qualifying distribution to a traditional IRA, you can, if certain conditions are satisfied, later roll the distribution into another 403(b) plan. For more information, see IRA as a holding account (conduit IRA) for rollovers to other eligible plans in chapter 1 of Pub. 590-A.

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:

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 can't 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 can't be withdrawn because:

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. For information on the gift tax, see Pub. 559, Survivors, Executors, and Administrators.

9. Worksheets

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

After completing the worksheets, you should maintain them with your 403(b) records for that year. Do not attach them to your tax return. At the end of the year or the beginning of the next year, you should compare your estimated compensation figures with your actual figures.

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.

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 didn't 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.

 Note. Use this worksheet to figure the cost of incidental life

 Note. Use this worksheet to figure includible compensation for your

 Note. If you will be age 50 or older by the end of the year, use this

 Note. Use this worksheet to figure your MAC.

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.

Adjusted gross income. This is generally the amount on line 38 of your 2016 Form 1040 or line 22 of your 2016 Form 1040A. However, you must add to that amount any exclusion or deduction claimed for the year for:

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 earlier under Eligible contributions. Also reduce your eligible contributions by any distribution from a Roth IRA that isn't rolled over, even if the distribution isn't taxable.

Do not reduce your eligible contributions by any of the following.

Testing period. The testing period consists of:

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 won't 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 didn't otherwise owe any taxes.

Maximum credit. This is a nonrefundable credit. The amount of the credit in any year can't 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 won't be entitled to this credit.

How to figure and report the credit. The amount of the credit you can get is based on the contributions you make and your credit rate. The credit rate can be as low as 10% or as high as 50%. Your credit rate depends on your income and your filing status. See Form 8880, Credit for Qualified Retirement Savings Contributions, to determine your credit rate.

The maximum contribution taken into account is $2,000 per person. On a joint return, up to $2,000 is taken into account for each spouse.

Figure the credit on Form 8880. Report the credit on line 51 of your 2016 Form 1040 or line 34 of your 2016 Form 1040A, and attach Form 8880 to your return.

11. How To Get Tax Help

If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.

Preparing and filing your tax return. Find free options to prepare and file your return on IRS.gov or in your local community if you qualify.

The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities, the elderly, and limited-English-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors.

You can go to IRS.gov and click on the Filing tab to see your options for preparing and filing your return which include the following.

Using direct deposit. The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund. IRS issues more than 90% of refunds in less than 21 days.

Getting a transcript or copy of a return. The quickest way to get a copy of your tax transcript is to go to IRS.gov/transcripts. Click on either "Get Transcript Online" or "Get Transcript by Mail" to order a copy of your transcript. If you prefer, you can:

Understanding an IRS notice or letter. Go to IRS.gov/notices to find additional information about responding to an IRS notice or letter.

Contacting your local IRS office. Keep in mind, many questions can be resolved on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/letushelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can't be handled online or by phone. All TACs now provide service by appointment so you'll know in advance that you can get the service you need without waiting. Before you visit, go to IRS.gov/taclocator to find the nearest TAC, check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on "Local Offices."

Watching IRS videos. The IRS Video portal (IRSvideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.

Getting tax information in other languages. For taxpayers whose native language isn't English, we have the following resources available. Taxpayers can find information on IRS.gov in the following languages.

The Taxpayer Advocate Service Is Here To Help You

What is the Taxpayer Advocate Service?

Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.

What Can the Taxpayer Advocate Service Do For You?

We can help you resolve problems that you can't resolve with the IRS. And our service is free. If you qualify for our assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

We have offices in every state, the District of Columbia, and Puerto Rico. Your local advocate's number is in your local directory and at taxpayeradvocate.irs.gov. You can also call us at 1-877-777-4778.

How Can You Learn About Your Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Our Tax Toolkit at taxpayeradvocate.irs.gov can help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

How Else Does the Taxpayer Advocate Service Help Taxpayers?

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to us at IRS.gov/sams.

Low Income Taxpayer Clinics

Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals, and tax collection disputes. Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. To find a clinic near you, visit IRS.gov/litc or see IRS Publication 4134, Low Income Taxpayer Clinic List.