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:

• $49,000 for 2010 and unchanged in 2011, or
• 100% of your includible compensation for your most recent year of service.

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

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.

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 is not the same as your employer's annual work period.

When figuring includible compensation for your most recent year of service, do not mix compensation or service of one employer with compensation or service of another employer.

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 maintains a 403(b) account on your behalf.

If your tax year is not 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.

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 2010, the professor's most recent year of service is her service from January through May 2010 and from October through December 2010.

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.

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:

• Your service during the year for which you are figuring the limit on annual additions, and
• Your service during your preceding tax years until the total service equals 1 year of service or you have taken into account all of your service with the employer.

You were employed on a full-time basis from July through December 2008 (1/2 year of service), July through December 2009 (1/2 year of service), and October through December 2010 (1/4 year of service). Your most recent year of service for computing your limit on annual additions for 2010 is the total of your service during 2010 (1/4 year of service), your service during 2009 (1/2 year of service), and your service during the months October through December 2008 (1/4 year of service).

If, at the close of the year, you have not 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.

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 is not 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:

• Received from the employer who maintains your 403(b) account, and
• Must be included in your income.

Includible compensation includes the following amounts.

• Elective deferrals (employer's contributions made on your behalf under a salary reduction agreement).
• Amounts contributed or deferred by your employer under a section 125 cafeteria plan.
• Amounts contributed or deferred, at the election of the employee, under an eligible section 457 nonqualified deferred compensation plan (state or local government or tax-exempt organization plan). Note. For information about treating elective deferrals under section 457 plans as Roth contributions, see Publication 575.
• Wages, salaries, and fees for personal services earned with the employer maintaining your 403(b) account.
• Income otherwise excluded under the foreign earned income exclusion.
• The value of qualified transportation fringe benefits (including transit passes, certain parking, and transportation in a commuter highway vehicle between your home and work).

Includible compensation does not include the following items.

1. Your employer's contributions to your 403(b) account.
2. Compensation earned while your employer was not an eligible employer.
3. Your employer's contributions to a qualified plan that:
   1. Are on your behalf, and
   2. Are excludable from income.
4. The cost of incidental life insurance.

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.

Includible compensation does not include the cost of 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.

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

• The value of your life insurance contract, which is the amount payable upon your death.
• The cash value of your life insurance contract at the end of the tax year.
• Your age on your birthday nearest the beginning of the policy year.
• Your current life insurance protection under an ordinary retirement income life insurance policy, which is the amount payable upon your death minus the cash value of the contract at the end of the year.

You can use Worksheet A, Cost of Incidental Life Insurance, in chapter 9, to determine the cost of your incidental life insurance.

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, Uniform One-Year Term Premiums for $1,000 Life Insurance Protection. The premium rate is determined based on your age on your birthday nearest the beginning of the policy year.

Age	Cost		Age	Cost
15	$1.27		49	$8.53
16	1.38		50	9.22
17	1.48		51	9.97
18	1.52		52	10.79
19	1.56		53	11.69
20	1.61		54	12.67
21	1.67		55	13.74
22	1.73		56	14.91
23	1.79		57	16.18
24	1.86		58	17.56
25	1.93		59	19.08
26	2.02		60	20.73
27	2.11		61	22.53
28	2.20		62	24.50
29	2.31		63	26.63
30	2.43		64	28.98
31	2.57		65	31.51
32	2.70		66	34.28
33	2.86		67	37.31
34	3.02		68	40.59
35	3.21		69	44.17
36	3.41		70	48.06
37	3.63		71	52.29
38	3.87		72	56.89
39	4.14		73	61.89
40	4.42		74	67.33
41	4.73		75	73.23
42	5.07		76	79.63
43	5.44		77	86.57
44	5.85		78	94.09
45	6.30		79	102.23
46	6.78		80	111.04
47	7.32		81	120.57
48	7.89

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 $117 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 $117.

1.	Enter the value of the contract (amount payable upon your death)	1.	$20,000.00
2.	Enter the cash value in the contract at the end of the year	2.	0.00
3.	Subtract line 2 from line 1. This is the value of your current life insurance protection	3.	$20,000.00
4.	Enter your age on your birthday nearest the beginning of the policy year	4.	44
5.	Enter the 1-year term premium for $1,000 of life insurance based on your age. (From Figure 3-1)	5.	$5.85
6.	Divide line 3 by $1,000	6.	20
7.	Multiply line 6 by line 5. This is the cost of your incidental life insurance	7.	$117.00

Lynne's cash value in the contract at the end of the second year is $1,000. In year two, the cost of Lynne's life insurance is calculated as shown in Table 3-2.

In year two, Lynne's employer will include $119.70 in her current year's income. Lynne will subtract this amount when figuring her includible compensation.

1.	Enter the value of the contract (amount payable upon your death)	1.	$20,000.00
2.	Enter the cash value in the contract at the end of the year	2.	$1,000.00
3.	Subtract line 2 from line 1. This is the value of your current life insurance protection	3.	$19,000.00
4.	Enter your age on your birthday nearest the beginning of the policy year	4.	45
5.	Enter the 1-year term premium for $1,000 of life insurance based on your age. (From Figure 3-1)	5.	$6.30
6.	Divide line 3 by $1,000	6.	19
7.	Multiply line 6 by line 5. This is the cost of your incidental life insurance	7.	$119.70

Floyd has been periodically working full-time for a local hospital since September 2008. He needs to figure his limit on annual additions for 2011. 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, transportation benefits, 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.

Year	Years of Service	Taxable Wages	Elective Deferrals
2011	6/12 of a year	$42,000	$2,000
2010	4/12 of a year	$16,000	$1,650
2009	4/12 of a year	$16,000	$1,650

Before Floyd can figure his limit on annual additions, he must figure includible compensation for his most recent year of service.

Because Floyd is not planning to work the entire 2011 year, his most recent year of service will include the time he is planning to work in 2011 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.

• Time he will work in 2011 is 6/12 of a year.
• Time worked in 2010 is 4/12 of a year. All of this time will be used to determine Floyd's most recent year of service.
• Time worked in 2009 is 4/12 of a year. Floyd only needs 2 months of the 4 months he worked in 2009 to have enough time to total 1 full year. Because he needs only one-half of the actual time he worked, Floyd will use only one-half of his income earned during that period to calculate wages that will be used in figuring his includible compensation.

Using the information provided in Table 3-3, wages for Floyd's most recent year of service are $66,000 ($42,000 + $16,000 + $8,000). His includible compensation for his most recent year of service is figured as shown in Table 3-4.

After figuring his includible compensation, Floyd determines his limit on annual additions for 2011 to be $49,000, the lesser of his includible compensation, $70,475 (Table 3-4), and the maximum amount of $49,000. taxmap/pubs/p571-011.htm#en_us_publink1000239668

Table 3-4. Worksheet B. Includible Compensation for Your Most Recent Year of Service1 Note. Use this worksheet to figure includible compensation for your most recent year of service. 1. Enter your includible wages from the employer maintaining your 403(b) account for your most recent year of service 1. $66,000 2. Enter elective deferrals excluded from your gross income for your most recent year of service2 2. 4,4753 3. Enter amounts contributed or deferred by your employer under a cafeteria plan for your most recent year of service 3. -0- 4. Enter amounts contributed or deferred by your employer to your 457 account (a nonqualified plan of a state or local government, or of a tax-exempt organization) for your most recent year of service 4. -0- 5. Enter the value of qualified transportation fringe benefits you received from your employer for your most recent year of service 5. -0- 6. Enter your foreign earned income exclusion for your most recent year of service 6. -0- 7. Add lines 1, 2, 3, 4, 5, and 6 7. 70,475 8. Enter the cost of incidental life insurance that is part of your annuity contract for your most recent year of service 8. -0- 9. Enter compensation that was both: Earned during your most recent year of service, and Earned while your employer was not qualified to maintain a 403(b) plan 9. -0- 10. Add lines 8 and 9 10. -0- 11. Subtract line 10 from line 7. This is your includible compensation for your most recent year of service 11. 70,475 1 Use estimated amounts if figuring includible compensation before the end of the year. 2 Elective deferrals made to a designated Roth account are not excluded from your gross income and should not be included on this line. 3$4,475 ($2,000 + $1,650 + $825).