Publication 571 - Tax-Sheltered Annuity Plans (403(B) Plans) Page 5
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21Includible Compensation
Cost of Incidental Life Insurance
tax year that you worked for the employer that
maintains a 403(b) account on your behalf.
Includible compensation does not include the
After identifying your most recent year of serv-
cost of incidental life insurance.
ice, the next step is to identify the includible
Tax year different from employer’s annual
compensation associated with that full year of
If all of your 403(b) accounts invest
work period. If your tax year is not the same
service.
!
only in mutual funds, then you have no
as your employer’s annual work period, your
Includible compensation is not the same as
incidental life insurance.
most recent year of service is made up of parts
CAUTION
income included on your tax return. Compensa-
of at least two of your employer’s annual work
If you have an annuity contract, a portion of
tion is a combination of income and benefits
periods.
received in exchange for services provided to
the cost of that contract may be for incidental life
your employer.
insurance. If so, the cost of the insurance is
Example. A professor who reports her in-
Generally, includible compensation is the
taxable to you in the year contributed and is
come on a calendar-year basis is employed on a
amount of income and benefits:
considered part of your basis when distributed.
full-time basis by a university that operates on
•
Your employer will include the cost of your insur-
Received from the employer who main-
an academic year (October through May). To
tains your 403(b) account, and
ance as taxable wages in box 1 of Form W-2.
figure her includible compensation for 2011, the
•
Must be included in your income.
Not all annuity contracts include life insur-
professor’s most recent year of service is her
service from January through May 2011 and
ance. Contact your plan administrator to deter-
Includible compensation includes the follow-
from October through December 2011.
mine if your contract includes incidental life
ing amounts.
insurance. If it does, you will need to figure the
•
Elective deferrals (employer’s contribu-
cost of life insurance each year the policy is in
Figuring Your Most Recent Year of
tions made on your behalf under a salary
effect.
Service
reduction agreement).
Figuring the cost of incidental life
•
Amounts contributed or deferred by your
insurance. If you have determined
To figure your most recent year of serv-
employer under a section 125 cafeteria
that part of the cost of your annuity
ice, begin by determining what is a full
plan.
contract is for an incidental life insurance pre-
year of service for your position. A full
mium, you will need to determine the amount of
•
Amounts contributed or deferred, at the
year of service is equal to full-time employment
the premium and subtract it from your includible
election of the employee, under an eligible
for your employer’s annual work period.
compensation.
section 457 nonqualified deferred com-
After identifying a full year of service, begin
pensation plan (state or local government
To determine the amount of the life insur-
counting the service you have provided for your
or tax-exempt organization plan).
ance premiums, you will need to know the fol-
employer starting with the service provided in
Note. For information about treating elec-
lowing information.
the current year.
tive deferrals under section 457 plans as
•
The value of your life insurance contract,
Roth contributions, see Publication 575.
which is the amount payable upon your
Part-time or employed only part of the year.
•
Wages, salaries, and fees for personal
If you are a part-time or a full-time employee
death.
services earned with the employer main-
who is employed for only part of the year, your
•
taining your 403(b) account.
The cash value of your life insurance con-
most recent year of service is your service this
tract at the end of the tax year.
•
Income otherwise excluded under the for-
year and your service for as many previous
•
eign earned income exclusion.
Your age on your birthday nearest the be-
years as is necessary to total 1 full year of
•
ginning of the policy year.
service. To determine your most recent year of
Pre-tax contributions (employer’s contribu-
tions made on your behalf according to
service, add the following periods of service:
•
Your current life insurance protection
your election) to a qualified transportation
•
under an ordinary retirement income life
Your service during the year for which you
fringe benefit plan.
insurance policy, which is the amount pay-
are figuring the limit on annual additions,
able upon your death minus the cash
and
Includible compensation does not include the
value of the contract at the end of the
•
following items.
Your service during your preceding tax
year.
years until the total service equals 1 year
1. Your employer’s contributions to your
of service or you have figured all of your
403(b) account.
You can use
Worksheet A, Cost of Incidental
service with the employer.
Life Insurance,
in chapter 9, to determine the
2. Compensation earned while your employer
cost of your incidental life insurance.
was not an eligible employer.
Example. You were employed on a full-time
3. Your employer’s contributions to a quali-
basis from July through December 2009 (1/2
Example. Your new contract provides that
fied plan that:
year of service), July through December 2010
your beneficiary will receive $10,000 if you
(1/2 year of service), and October through De-
should die before retirement. Your cash value in
a. Are on your behalf, and
cember 2011 (1/4 year of service). Your most
the contract at the end of the first year is zero.
b. Are excludable from income.
recent year of service for computing your limit on
Your current life insurance protection for the first
annual additions for 2011 is the total of your
year is $10,000 ($10,000 − 0).
4. The cost of incidental life insurance, see
service during 2011 (1/4 year of service), your
The cash value in the contract at the end of
later.
service during 2010 (1/2 year of service), and
year two is $1,000, and the current life insurance
your service during the months October through
If you are a church employee or a for-
protection for the second year is $9,000
December 2009 (1/4 year of service).
!
eign missionary, figure includible com-
($10,000 – $1,000).
pensation using the rules explained in
CAUTION
The 1-year cost of the protection can be
Not yet employed for 1 year. If, at the close
chapter
5.
calculated by using
Figure 3-1, Table of
of the year, you have not yet worked for your
Contributions after retirement. Nonelective
One-Year Term Premiums for $1,000 Life Insur-
employer for 1 year (including time you worked
contributions may be made for an employee for
ance
Protection. The premium rate is deter-
for the same employer in all earlier years), use
up to 5 years after retirement. These contribu-
the period of time you have worked for the em-
mined based on your age on your birthday
tions would be based on includible compensa-
ployer as your most recent year of service.
tion for the last year of service before retirement.
nearest the beginning of the policy year.
Chapter 3 Limit on Annual Additions
Page 5
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