New legislation has increased the amount employees may contribute to 403(b) retirement plans each year and has changed the way the tax-deferring limit will be calculated beginning in 2002.
Gone are the complex and often confusing formulas used to calculate limits, repealed by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), passed in June. In its place are the following new limits:
The limit is automatically $11,000. Instead of using numerous complex formulas to determine ones limit, it is now an automatic $11,000.
Employees, ages 50 or older by Dec. 31, 2002, have a $12,000 limit.
Individuals with the equivalent of 15 years of service, may qualify for an increase of up to $3,000 annually in their limit according to Internal Revenue Code (IRC) guidelines. This catch-up feature of the legislation is not automatic. To be eligible, annual contributions to the retirement plan must average less than $5,000 per year for the years of participation in the plan. Individuals who have contributed up to the maximum limit in past years will probably not be eligible for this increased amount.
Participants who are making supplemental contributions have in the past received a November Letter, so called because it used to be mailed in early November. That letter provides a calculation of the limit on the supplemental amount an individual can contribute for the coming year. The 2001 November Letter is expected to mail in early December.
Individuals wishing to have their current extra or supplemental contribution amounts continue into 2002, do not need to do anything. Current contribution amounts, no matter how large or small, will carry over automatically into 2002, provided a continuous appointment exists.
In past years, if the extra or supplemental contribution was adjusted or cancelled to remain within IRC limits, employees were required to submit a new form to renew the amount for the following year. Now the M-Pathways system will monitor and automatically adjust amounts when U-M faculty and staff members begin to exceed the IRC limit. M-Pathways will not cancel contributions completely. So, participants will not miss any deductions since the current supplemental amount will carry over into 2002.
The table below illustrates the amount each limit will increase through 2006 and the total possible limit if individuals qualify for both the age 50 and older and 15-plus years of service elections. For tax years after 2006, the 403(b) limit and the age 50 election will increase in $500 increments indexed to inflation.