US Internal Revenue Service: p571--1999

8/14/2019 US Internal Revenue Service: p571--1999

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ContentsImportant Change for 1999 ............... 1

Important Reminders ......................... 1

Introduction ........................................ 2

What Is a Tax-Sheltered Annuity(TSA) Plan? .................................. 2

Qualified Employer ............................ 2

Eligible Employees ............................ 3

Contributions ...................................... 3

Salary Reduction Agreement ............ 4

Limit on Elective Deferrals ................ 4

Limit on Employer Contributions ..... 5

Exclusion Allowance ......................... 5

Catch-up Election AlternativeLimits for Certain Employees .... 9

Limit on Employer Contributions toMore Than One Plan ................... 12

Other Rules ......................................... 12

Distributions and Rollovers .............. 14

How To Get More Information .......... 16

Worksheets ......................................... 17

Index .................................................... 23

Important Changefor 1999Photographs of missing children. The

Internal Revenue Service is a proud partnerwith the National Center for Missing and Ex-ploited Children. Photographs of missingchildren selected by the Center may appearin this publication on pages that would other-wise be blank. You can help bring thesechildren home by looking at the photographsand calling 1800THELOST (18008435678) if you recognize a child.

Important RemindersIncludible compensation. Your includiblecompensation for purposes of figuring yourexclusion allowance includes:

1) Elective deferrals (your employer's con-tributions made on your behalf under asalary reduction agreement),

2) Amounts contributed or deferred by youremployer under a section 125 cafeteriaplan, and

3) Amounts contributed or deferred undera section 457 plan (state or local gov-ernment or tax-exempt organizationplan).

Your exclusion allowance is the amount ofemployer contributions (including electivedeferrals) to your tax-sheltered annuity con-tract or account that you can exclude from

Departmentof theTreasury

InternalRevenueService

Publica tion 571Cat. No. 46581C

Tax-ShelteredAnnuityPrograms forEmployees ofPublic Schoolsand CertainTax-ExemptOrganizations

For use in preparing

1999 Returns


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income. For more information on includiblecompensation, see Includible Compensation,later.

Contributionsemployed ministers. If youare a minister and if in the exercise of yourministry you are employed by an organizationwith which you share common religiousbonds, but which is not a certain type of tax-exempt organization, you may not have toinclude contributions made on your behalf toa tax-sheltered annuity plan. You do not have

to include contributions to a church plan if youwould have been able to exclude them hadyou been an employee of a church.

For more information, see Special Rulesunder Includible Compensation.

IntroductionThis publication explains the federal tax pro-visions that apply to tax-sheltered annuity(TSA) plans offered to employees of publicschools and certain tax-exempt organizations.The discussions primarily cover employercontributions (elective deferrals) made undera salary reduction agreement. The publicationis for employees who participate in TSA

plans. It is not for custodians or plan admin-istrators because it does not cover many ofthe operating requirements of these plans.

A tax-sheltered annuity plan, often re-ferred to as a 403(b) plan, tax-deferredannuity plan, or simply TSA plan (which isused in this publication), is a retirement planthat, if operated properly by a qualified em-ployer, is tax-exempt.

A qualified employer can purchase TSAcontracts or accounts for eligible employees.Three types of employers qualify: publicschools, certain tax-exempt organizations,and certain employers of ministers. Your em-ployer may be able to help you determinewhether you are an eligible employee.

The most common way to contribute to

TSA plans is through a salary reductionagreement. This is an agreement under whichan employee agrees to take a reduction insalary or to forego a salary increase and theemployer contributes that amount to a TSAplan for that employee. These employer con-tributions made on your behalf are calledelective deferrals. A TSA plan can also befunded through nonelective employer contri-butions, after-tax employee contributions, ora combination of these contributions.

There is an annual limit on elective defer-rals. Generally, you cannot defer more than$10,000 for 1999 for all plans covering you,including TSA plans. If elective deferral con-tributions on your behalf are more than theallowable amount, you must include the ex-cess in your gross income.

Limits are placed on the contributions thatcan be made by an employer to TSA plans.Special rules may apply in determining thelimit on employer contributions for you to aTSA plan if you also are covered by a qual-ified plan.

The exclusion allowance is the amount ofemployer contributions (including electivedeferrals) to your TSA contract or accountthat you can exclude from income. You paytax on these excluded amounts when youreceive a distribution from the TSA.

Employees of public schools and publicschool systems, hospitals, home health ser-vice agencies, health and welfare serviceagencies, churches, and certain church-

related organizations can make a catch-upelection to increase the limit on employercontributions for the exclusion allowance.

The Other Rules section includes a dis-cussion of the cost of insurance under a TSAplan and a discussion of social security andMedicare taxes on employer contributions.

In most cases, the payments you receive,or that are made available to you, under yourTSA contract or account are taxable in full asordinary income. In general, the same taxrules apply to distributions from TSA plansthat apply to distributions from other retire-ment plans. These rules are explained inPublication 575, Pension and Annuity In-come. If you transfer all or part of your interestfrom a TSA contract or account to anotherTSA contract or account, the transfer may betax free. You can generally roll over tax freeall or any part of a distribution from a TSAplan to a traditional IRA or another TSA plan.

You can use the worksheets at the endof this publication to figure many of the limitsthat apply to your TSA plan.

Useful ItemsYou may want to see:

Publication

15A Employer's Supplemental TaxGuide

575 Pension and Annuity Income

590 Individual Retirement Arrange-ments (IRAs) (Including RothIRAs and Education IRAs)

Form (and Instructions)

W-2 Wage and Tax Statement

1099-R Distributions From Pensions,Annuities, Retirement or Profit-Sharing Plans, IRAs, InsuranceContracts, etc.

5330 Return of Excise Taxes Relatedto Employee Benefit Plans

See How To Get More Information, nearthe end of this publication for informationabout getting these publications and forms.

What Is aTax-Sheltered Annuity(TSA) Plan?A tax-sheltered annuity plan, often referred toas a 403(b) plan, tax-deferred annuityplan, or simply TSA plan (which is used in

this publication), is a retirement plan that, ifoperated properly by a qualified employer, istax-exempt.

The TSA plan can invest funds for partic-ipating employees in:

Annuity contracts,

Custodial accounts holding mutual fundshares, or

Retirement income accounts (definedcontribution plans maintained bychurches or certain church-related or-ganizations).

Throughout this publication, wherever TSAcontract appears, it refers to any one of these

funding arrangements, unless otherwisespecified.

Tax advantage for employees. Generally,you can exclude from current income contri-butions by a qualified employer to purchasea TSA contract for you under a TSA plan.You do not have to include the contributions(and any earnings on them) in your taxableincome until you begin to receive annuitypayments from your TSA plan, usually afteryou retire. Because of this tax postponement,

these plans are described as 'tax-deferred"or "tax-sheltered" annuities.

Qualified EmployerA qualified employer can purchase TSA con-tracts for eligible employees. Three types ofemployers qualify public schools, certaintax-exempt organizations, and certain em-ployers of ministers.

Public SchoolsA state or local government or any of itsagencies or instrumentalities can be a qual-ified employer. However, employers arequalified employers only for employees whoperform (or have performed) services, directlyor indirectly, for an educational organization,such as a public school. For this purpose, anIndian tribal government is a state govern-ment.

Educational organization. An educationalorganization is one that normally maintains aregular faculty and curriculum and normallyhas a regularly enrolled body of students inattendance at the place where it regularlycarries on educational activities.

Tax-Exempt OrganizationsGenerally, a qualified employer includes anorganization that is tax-exempt because it isorganized and operated exclusively for reli-gious, charitable, scientific, public safetytesting, literary, or educational purposes. Aqualified employer also includes a tax-exemptorganization that is organized and operatedexclusively to encourage national or interna-tional amateur sports competition (but only ifno part of its activities involve the provisionof athletic facilities or equipment), or for theprevention of cruelty to children or animals.The organization can be a corporation, com-munity chest, fund, or foundation.

Government instrumentalities. Wholly-owned instrumentalities (other than publicschools) of state or municipal governmentsgenerally are not qualified employers. How-ever, a separate instrumentality that has beenrecognized as tax-exempt by the InternalRevenue Service because it is organized andoperated exclusively for one or more of theexempt purposes described earlier is a qual-ified employer. A separately organizedschool, college, university, or hospital mayqualify if it is not an activity essential to andconducted under a branch or department ofa state or municipal government.

Cooperative hospital service organization.A cooperative hospital service organizationthat meets certain requirements is a qualifiedemployer.

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Uniformed Services University of theHealth Sciences. This is a federal organ-ization authorized to train medical students forthe uniformed services. The rules in thispublication apply to TSA contracts purchasedfor civilian faculty and staff for work they per-formed after 1979.

Indian tribal governments. Any TSA con-tract purchased by an Indian tribal govern-ment for its employees is treated as havingbeen purchased by a tax-exempt organization

that is qualified to provide TSA contracts forits employees. An Indian tribal governmentincludes any political subdivisions, agencies,and instrumentalities of it, as well as anycorporations that are chartered under federal,state, or tribal law and owned by it.

Certain Employersof MinistersA qualified employer of a minister can be ei-ther the minister (if self-employed) or an or-ganization with which the minister shares acommon bond. A self-employed minister istreated as employed by a tax-exempt organ-ization that is a qualified employer. An or-ganization, other than a qualified tax-exempt

organization of the type described earlier un-der Tax-Exempt Organizations, is a qualifiedemployer of a minister if the organization andthe minister share common religious bonds.

Eligible EmployeesA qualified employer can purchase TSA con-tracts only for eligible employees. If you aresubject to the will and control of a qualifiedemployer regarding what work you do andhow you do it, you are an eligible employee.If you are subject to the control or directionof another as to the result only, and not howyou do the work, you will generally be an in-

dependent contractor, and not an eligibleemployee.The employer who pays you for services

you perform may be able to help you deter-mine whether you are an eligible employee.

Employees of PublicSchool SystemsYou are an eligible employee if you performservices as an employee, either directly orindirectly, for a public school system.

For example, if you are a principal, clericalemployee, custodial employee, or teacher ata public elementary school, you are an eligi-ble employee because you are performingservices directly for a public school.

If you are involved in the operation or di-rection of an education program carried outthrough public schools, you are an eligibleemployee because you are performing ser-vices indirectly for those public schools. SeeElected or appointed to office, later.

If you are an employee participating in anin-home teaching program, you are an eligibleemployee since these programs are merelyan extension of the activities carried on bypublic schools.

Employees of a state's Department of Ed-ucation. If you are a janitorial, custodial, orgeneral clerical employee appointed by astate commissioner of education, you are an

eligible employee because you indirectly per-form services for the public schools.

If you were appointed by a state commis-sioner of education to a position involving asignificant degree of executive or policymaking authority, and your appointment isbased on required training or experience inthe field of education, you are an eligibleemployee because you indirectly performservices for the public schools.

Elected or appointed to office. If youoccupy an elective or appointive office, youmay be an eligible employee. You are an eli-gible employee if your office is one to whicha person is elected or appointed only if he orshe has received training, or is experienced,in the field of education.

A commissioner or superintendent of ed-ucation generally is considered an employeeperforming services for an educational or-ganization. However, a university regent ortrustee, or a member of a board of education,is not an eligible employee.

Employees of a state teachers' retirementsystem. If you are an employee of a retire-ment system set up to administer a stateteachers' retirement program, you are not aneligible employee because you are not per-forming services, either directly or indirectly,for a public school.

Employees of CertainTax-Exempt OrganizationsCertain tax-exempt organizations (describedunder Qualified Employer, earlier) can pur-chase TSA contracts for their employees.Employees of these tax-exempt organizationsinclude individuals who perform services associal workers, members of the clergy,teachers, professors, clerks, secretaries, etc.

For more information on who is an em-ployee, see Publication 15A.

MinistersIf you are a duly ordained, commissioned, orlicensed minister of a church and are workingas a minister or chaplain, you may be an eli-gible employee. You are an eligible em-ployee if, in connection with the exercise ofyour ministry, you are either self-employedor working for an organization with which youshare common religious bonds, but which isnot a qualified tax-exempt organization of thetype described earlier under Tax-Exempt Or-ganizations.

Contributions

A TSA plan can be funded by the followingcontributions:

Elective deferrals,

Nonelective employer contributions,

After-tax employee contributions, or

A combination of the above.

Elective deferrals defined. Under a salaryreduction agreement (defined later), youremployer's plan may permit your employer tocontribute part of your pay to a retirementfund, rather than pay it to you. These em-ployer contributions are called electivedeferrals because:

1) You choose (elect) to set aside part ofyour pay, and

2) Tax on that part of your pay is postponed(deferred) until it is distributed to you.

Nonelective employer contributions de-fined. An employer contribution to a TSAplan is treated as a nonelective contributionif employees are not required to choose thecontributions. The employer chooses to makethese contributions to the TSA plans. Theemployer must be a qualified employer (de-

fined earlier) for the contributions to be ex-cluded from the employee's gross income.These contributions are subject to the limiton employer contributions discussed later.

After-tax employee contributions. If theplan permits these contributions, an em-ployee contribution made with funds on whichincome taxes have already been paid istreated as an after-tax contribution. A salarypayment on which income tax was withheldis an example of such funds. These contri-butions are subject to the limit on employercontributions.

Exclusion From Gross

IncomeGenerally, if you are an eligible employee(defined earlier), you can exclude from grossincome your qualified employer's (definedearlier) contributions to your TSA contract.

TIPContributions made by a self-employed minister or chaplain who istreated as employed by a qualified

tax-exempt organization to a retirement in-come account that is treated as a TSA con-tract are deductible (rather than excludible)up to the exclusion limits for TSA plans (dis-cussed next). This is true unless the contri-butions are made by the employer of achaplain and excluded from the chaplain'sincome as discussed under Specials Rules

underIncludible Compensation, later.

Exclusion LimitsGenerally, the amount of contributions youcan exclude for a tax year is the smallest ofthe following limits:

1) The limit on elective deferrals (discussedlater) for the year.

2) The limit on employer contributions (dis-cussed later) for the limitation year (dis-cussed later) ending with or within yourtax year.

3) The exclusion allowance (discussedlater) for your tax year.

Alternative limits. You may be able to usean alternative limit to increase the amount youcan exclude. See Catch-up Election Alter-native Limits for Certain Employees, later.

TIPThe worksheets at the end of thispublication are designed to help youdetermine the contribution limits that

apply to you. To determine the exclusion al-lowance, use Worksheet 1; for the limit onemployer contributions, useWorksheet 2; andfor the limit on elective deferrals, use Work-sheet 3. If you qualify to choose an alternativelimit, use Worksheet 4, 5, or 6, whicheverapplies. SeeCatch-up Election AlternativeLimits for Certain Employees, later.

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Rollover contributions. For purposes ofdetermining the exclusion allowance, youremployer's contributions do not include arollover contribution from another TSA con-tract or a traditional individual retirement ar-rangement (IRA). A traditional IRA is any IRAthat is not a Roth, SIMPLE, or education IRA.

Only elective deferrals. If all of the contri-butions are elective deferrals, the total mustnot be more than the smallest of the threelimits in the preceding list.

Only nonelective contributions. If all of thecontributions are nonelective contributions,only limits (2) and (3) apply.

Both elective deferrals and nonelectivecontributions. If the total contributions in-clude both elective deferrals and nonelectivecontributions and limit (1) is the smallest ofthe limits in the preceding list, the electivedeferrals minus limit (1) is an excess deferraland is included in your gross income. Thetotal of all contributions (including the electivedeferrals) minus the smaller of limit (2) or (3)is an excess contribution.

More than one TSA contract. If for any taxyear elective deferrals are contributed to morethan one TSA contract for you (whether or notwith the same employer), you must combineall the elective deferrals to determine whetherthe total is more than the limit for that year.See Limit on Elective Deferrals, later.

Treatment of ExcessContributionsIf the contributions to your TSA contract fora year are more than any of the limits dis-cussed above under Exclusion Limits, youmust include the excess in your income forthat year. Further, if you have an excess be-cause the contributions are more than limit

(2), that excess reduces the amount of yourexclusion allowance for future years, eventhough the excess has already been includedin your income.

For more information on the treatment ofexcess contributions, see Excess Deferrals,Limit on Employer Contributions, and Tax onExcess Contributions to a Custodial Account,later.

Salary ReductionAgreementThe most common way to contribute to TSA

contracts is through a salary reductionagreement. This is an agreement between theemployer and employee under which theemployee agrees to take a reduction in salaryor to forego a salary increase and the em-ployer contributes that amount to a TSA con-tract for that employee. These employer con-tributions are called elective deferrals andexcluded from the employee's income whenmade and included in the employee's incomewhen withdrawn. See Limit on ElectiveDeferrals, for more information.

TIPYou can enter into more than onesalary reduction agreement during atax year. In addition, for salary re-

duction purposes, you must use compen-

sation that has not yet been made availableto you. (However, to determine what com-pensation can be used to figure the maximumexclusion allowance, seeIncludible Compen-sation, later, underExclusion Allowance.)

Treatment of contributions. Amounts con-tributed by your employer under a salary re-duction agreement and invested in a TSAcontract for you are generally treated aselective deferrals (defined under Contribu-tions, earlier).

Exemption. An employer contribution toyour TSA contract is not treated as an electivedeferral if it is made as a condition of em-ployment or as a one-time choice by youwhen you first become eligible to participatein the agreement. But, if you can change orend the election to participate in the agree-ment, the election is not a one-time choiceand the contributions are elective deferrals.

Limit on ElectiveDeferralsAs defined earlier, elective deferrals are em-

ployer contributions made under a salary re-duction agreement to your TSA contract.There is an annual limit on the amount ofelective contributions that you can defer. Todetermine the limit on elective deferrals, useWorksheet 3.

Deferrals subject to limit. The limit appliesto the total of all elective deferrals contributedfor the year on your behalf (even if by differentemployers) to:

Cash or deferred arrangements (knownas section 401(k) plans) to the extentexcluded from your gross income,

Section 501(c)(18) plans created before

June 25, 1959, and only to the extentexcluded from your gross income,

SIMPLE plans,

Simplified employee pension (SEP)plans, and

Tax-sheltered annuity (TSA) plans.

Dollar limit. Generally, you cannot defermore than an allowable amount each year forall plans covering you, including TSA plans.For 1999, the allowable amount (limit) is$10,000. This limit applies without regard tocommunity property laws. If you defer morethan the allowable amount for a tax year, youmust include the excess in your gross income

for that year. See Excess Deferrals, later.Increase for 15-year employees. If youhave a TSA contract and you have completedat least 15 years of service with a publicschool system, hospital, home health serviceagency, health and welfare service agency,church, or convention or association ofchurches (or associated organization), the$10,000 limit is increased each tax year. Thelimit is increased by the smallestof the fol-lowing:

1) $3,000,

2) $15,000, reduced by increases to the$10,000 limit you were allowed in earlieryears because of this rule, or

3) $5,000 times the number of your yearsof service for the organization, minus thetotal elective deferrals made by the or-ganization for you for earlier years.

For example, if you qualify, you may in-crease your elective deferrals to $13,000. Forthe computation, see Step 2 of Worksheet 3.

Cost-of-living adjustment. Under cur-rent law, the $10,000 limit is to be increasedto reflect any increases in the ConsumerPrice Index in future years.

Excess DeferralsExcess deferrals are total elective deferralsfor the year minus the limit on elective defer-rals.

Tax Treatment

General rule. If the total you defer for a taxyear is more than the limit for the year, youmust include the excess in your gross incomefor that year on line 7 of Form 1040.

Distribution of excess. If the plan allowsyou to receive the excess amount and that is

what you choose to do, you must notify theplan as explained next.One plan. If only one plan is involved,

you must notify the plan by March 1 after theend of the tax year that an excess amountwas deferred. The plan must then pay you theexcess, along with any income on thatamount, by April 15.

CAUTION

!Because you are responsible for no-tifying the plan, you must monitorcontributions to the plan.

More than one plan. If more than oneplan is involved, you must notify each planby March 1 of the amount to be paid from thatparticular plan, and the plan must then pay

you that amount, along with any income onthat amount, by April 15.Distribution of excess by the required

date. If you receive the excess amount byApril 15, do not include it again in your grossincome and do not subject it to the additional10% tax for premature distributions. However,any income earned on the excess deferralthat is distributed to you is taxable to you inthe tax year paid but is not subject to the ad-ditional 10% tax for premature distributions.

If you receive part of the excess deferraland the income earned on it, you must treatthe distribution as if ratably received from theexcess deferral and the income earned on it.

Example. Assume that your excessdeferral is $1,800 and the income earned on

it is $200. If your distribution is $1,000, $900(1800/2000 x $1,000) is from the excess deferraland $100 (200/2000 x $1,000) is from the incomeearned that must be separately reported.

Excess left in the plan. If you leave theexcess deferral in the plan, you must includethe excess amount in your gross income forthe tax year in which the amount was de-ferred. You cannot treat the excess amountas an investment in the contract (tax-free re-turn of cost) when you figure the taxableamount of any future benefits or distributions.Thus, an excess deferral left in the plan wouldbe taxed twice, once when contributed andagain when distributed.

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Limit on EmployerContributionsThere is a limit on employer contributions totax-sheltered annuity (TSA) plans for eachlimitation year (defined later). TSA plans aretreated as defined contribution plans for pur-poses of this limit (which is also called thegeneral rule). Under the general rule, anemployer's contributions (including electivedeferrals) to an employee's account under adefined contribution plan should not be morethan the lesser of:

1) $30,000, or

2) 25% of the employee's compensation(defined later) for the year.

This limit is in addition to the exclusion al-lowance (discussed later) and the limit onelective deferrals (discussed earlier). To de-termine the limit on employer contributionsunder the general rule, use Worksheet 2.Also, see Catch-up Election AlternativeLimits for Certain Employees, later.

Limitation year. Generally, your limitationyear is the calendar year. However, you can

elect to change to a different limitation yearconsisting of any period of 12 consecutivemonths by attaching a statement to your in-dividual income tax return for the tax year youmake the change.

Contributions in excess of employer limit.An excess employer contribution must be in-cluded in your gross income in the tax yearwhen it is made.

For future tax years, the exclusion allow-ance (see Exclusion Allowance, later) mustbe reduced by this excess contribution eventhough it was not excludable from your grossincome in the tax year when it was made.

TSA plan and qualified plan. If the limitis exceeded because you must combine a

TSA plan with a qualified plan, the same ruleapplies. You must include the excess in yourgross income for the tax year the excesscontribution is made and reduce your exclu-sion allowance for any future years in whichyou are a participant in a TSA plan.

If you are a participant in both a TSA planand a qualified plan, see Limit on EmployerContributions to More Than One Plan, later.

Excess contribution in earlier years. Ifin earlier years your employer made annualcontributions to a TSA plan for you that weremore than the annual maximum permittedunder this limit on employer contributions,your exclusion allowance is reduced by theexcess.

Reduction procedure. The exclusion al-

lowance is reduced by including the excesscontributions from prior years in amountspreviously excludable (discussed later underExclusion Allowance). Include prior years'excess contributions in amounts previouslyexcludable only if the limit was exceeded fora tax year beginning after January 24, 1980.

Compensation. Generally, for purposes ofthe 25% of compensation limit (item (2) at thebeginning of this discussion), compensationincludes:

Wages, salaries, and fees for personalservices with the employer maintainingthe plan, even if excludable as foreignearned income,

Certain taxable accident and health in-surance payments,

Moving expense payments or reimburse-ments paid by your employer, if suchpayments are not deductible by you,

The value of nonqualified stock optionsgranted to you that are includible in yourgross income in the year granted,

Elective deferrals, and

Amounts contributed or deferred by your

employer for a cafeteria plan, or a section457 plan.

Generally, compensation does not include:

Contributions toward a TSA contract(other than elective deferrals),

Contributions toward a deferred com-pensation plan if, before applying the limiton employer contributions, the contribu-tions are not taxable,

Distributions from a deferred compen-sation plan,

Proceeds from the disposition of stockacquired under a qualified stock option,and

Certain other amounts that areexcludable from your income, such asgroup term life insurance premiums thatare not taxable.

More than one TSA contract. For each yearyou apply this limit, you must combine thecontributions to all TSA contracts made onyour behalf by your employer. This is donewhether or not you elect one of the alternativelimits discussed under Catch-up Election Alternative Limits for Certain Employees,later. You may also have to combine contri-butions to qualified plans of the same em-ployer or an employer that you control (forpurposes of applying this limit). See Limit onEmployer Contributions to More Than One

Plan, later.

Exclusion AllowanceThe exclusion allowance is the amount ofemployer contributions (including electivedeferrals) to your TSA contract that you canexclude from income. To figure the amountof the exclusion allowance, see How To Fig-ure, later. You pay tax on the excludedamount when you receive a distribution fromthe TSA contract.

More than one TSA contract. If, during anytax year, you have two or more TSA con-

tracts, custodial accounts, or retirement in-come accounts maintained by your employer,figure only one exclusion allowance for theTSA contracts because they are consideredas one TSA contract.

More than one employer. If more than onequalified employer contributes to a TSA con-tract for you, you must figure a separate ex-clusion allowance for each qualified em-ployer. Do not include amounts contributed,compensation, or years of service for onequalified employer in the computation for an-other qualified employer. Special rules applyto church employees, as discussed underYears of Service, later.

Employer must remain qualified. The ex-clusion allowance applies only to those con-tributions made while your employer was aqualified employer. If, for example, your em-ployer loses tax-exempt status and is nolonger qualified, your exclusion allowance willnot apply to the employer's contributionsmade during period(s) that the employer isnot qualified.

Catch-up election for certain employees.Certain employees can elect to substitute the

limit on employer contributions for the exclu-sion allowance under an alternate rule calledthe overall limit (explained under Catch-upElectionAlternative Limits for Certain Em-ployees, later). Only employees of publicschools, hospitals, home health serviceagencies, health and welfare service agen-cies, churches, and certain church-relatedorganizations can make the election.

Minimum exclusion allowance for churchemployees. If you are a church employee(defined later under Years of Service) andyour adjusted gross income (figured withoutregard to community property laws) is lessthan $17,000, you are entitled to exclude fromyour gross income a certain minimum amount

called a minimum exclusion allowance. Theminimum is your exclusion allowance figuredas explained earlier, but not less than thesmaller of:

1) $3,000, or

2) Your includible compensation (definedlater).

How To FigureTo determine your annual exclusion allow-ance, you will need to know the following:

Includible compensation,

Years of service, and

Amounts previously excludable.

You can determine the exclusion allowanceat the end of your tax year by using Work-sheet 1 at the end of this publication.

Reduction of the exclusion allowance.You must reduce your exclusion allowanceby the excess of your employer's contribu-tions (for tax years beginning after January24, 1980) over the limit on employer contri-butions for those years. (See Contributions inexcess of employer limitunder Limit on Em-ployer Contributions, earlier.)

For future years, treat the excess asthough it were an amount previouslyexcludable.

Includible CompensationFor purposes of figuring your exclusion al-lowance, includible compensation generallyis the amount of pay that you received fromthe employer who made contributions to yourTSA contract and that you must include inincome for the most recent period (ending nolater than the end of your tax year) which youcan count as one year of service. It does notinclude your employer's contributions to yourTSA contract. You determine the amount thatmust be included in income without taking intoaccount the foreign earned income exclusion.See Most Recent One-Year Period of Ser-vice, later.

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For purposes of figuring your exclusionallowance, the following amounts areincludible compensation. Generally, theseamounts are not included in income.

Elective deferrals (employer's contribu-tions made on your behalf under a salaryreduction agreement).

Amounts contributed or deferred by youremployer under a section 125 cafeteriaplan.

Amounts contributed or deferred under a

section 457 nonqualified deferred com-pensation plan (state or local governmentor tax-exempt organization plan).

Self-employed ministers. If your are aself-employed minister treated as an em-ployee of a tax-exempt organization, yourincludible compensation is your net earningsfrom your ministry minus the contributionsmade to the retirement plan on your behalfand the deduction for half of the self-employ-ment tax.

Special RulesWhen figuring your includible compensation,you should examine the following exceptionsand definitions.

Employer not qualified. Only the compen-sation earned from the employer purchasingyour TSA contract is includible compensation.Do not include compensation earned whileyour employer was not a qualified employer.However, your employer's status when youactually receive the compensation does notmatter.

Other employers. Compensation fromemployers who are not purchasing your TSAcontract and compensation from othersources generally is not includible compen-sation. However, see Service with one em-ployerunder Years of Service, later.

Contributions for a TSA contract. Contri-

butions by your employer for a TSA contractare not part of includible compensation.

Foreign missionary. However, if you area foreign missionary during the tax year, yourincludible compensation includes contribu-tions by the church during the year towardyour TSA contract.

You are a foreign missionary if:

1) You are a lay person or a duly ordained,commissioned, or licensed minister of achurch,

2) You are an employee of a church or aconvention or association of churches,and

3) You are performing services for thechurch outside the United States.

Contributions to a church plan on behalfof a minister. If you are a duly ordained,commissioned, or licensed minister and, inthe exercise of your ministry, you are em-ployed by an organization with which youshare common religious goals, but which isnot a qualified tax-exempt organization of thetype described earlier under Tax-Exempt Or-ganizations, contributions made to a churchplan on your behalf are excluded from yourgross income to the extent they would havebeen excluded had you been an employeeof a church.

For purposes of this rule, a minister of achurch also includes:

1) A self-employed minister, and

2) A minister employed by an organizationother than a tax-exempt organizationthat shares a common religious bondwith the minister.

Contributions to a TSA contract and aqualified retirement plan. If your employermakes contributions for you toward both aTSA contract and a qualified retirement plan,your employer's contributions to the qualifiedretirement plan that you can exclude from in-

come are not part of includible compensationfor figuring your exclusion allowance.

Contributions that are more than your ex-clusion allowance. Contributions that aremore than your exclusion allowance are notpart of compensation for figuring your exclu-sion allowance, but they must be included inyour gross income.

Example. After taking a reduction in sal-ary to pay for your employer's contribution toa TSA contract during your first year of em-ployment, you received a salary of $12,000.According to your agreement, $2,800 ($400more than your exclusion allowance) is con-tributed for your contract. Use $12,000 asincludible compensation in figuring the exclu-sion allowance, even though you must include$12,400 in gross income.

The cost of incidental life insurance. Thecost of incidental life insurance provided un-der a TSA contract is not includible compen-sation even though the cost is taxable to you.This part of the cost of your TSA contract istreated as contributed by you, rather thanyour employer, and is part of your cost (basis)in the contract.

Foreign earned income exclusion.Excludable foreign earned income is part ofincludible compensation.

Most Recent One-Year Periodof ServiceWhen determining your includible compen-sation for purposes of figuring the exclusionallowance, first take into account the servicesyou performed during the tax year for whichyou are figuring the exclusion allowance.Keep in mind that your most recent one-yearperiod of service may not be the same asyour employer's most recent annual workperiod. This can happen if your tax year isnot the same as that of your employer.

Tax year different than that of employer.If your tax year is not the same as that of youremployer, your most recent one-year periodof 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 employedon a full-time basis by a university that oper-ates on an academic year (October throughMay). For purposes of computing her exclu-sion allowance for 1999, the professor's mostrecent one-year period of service consists ofher service performed during January throughMay of 1999 and her service performed dur-ing October through December of 1999.

Part-time or employed only part of year.If you are a part-time employee, or a full-timeemployee who is employed for only part of theyear, your most recent one-year period of

service consists of your service this year andyour service for as many previous years asis necessary to total one full year of service.(See Full year of service, later, under Rulesfor Figuring.) You add up your most recentperiods of service to determine your most re-cent one-year period of service. First, takeinto account your service during your tax yearfor which the exclusion allowance is beingdetermined. Then add your service duringyour next preceding tax year and subsequenttax years until your total service equals oneyear of service.

Example. You were employed on a full-time basis during the months July throughDecember 1997 (1/2 year of service), Julythrough December 1998 (1/2 year of service),and October through December 1999 (1/4year of service), your most recent one-yearperiod of service for purposes of computingyour exclusion allowance for 1999 is the totalof your service during 1999 (1/4 year of ser-vice), your service during 1998 (1/2 year ofservice), and your service during the monthsOctober through December 1997 (1/4 yearof service).

Not yet employed for one year. If at theclose of your tax year, you have not yet

worked for your employer for one year (in-cluding time you worked for the same em-ployer in earlier tax years), use the period oftime you have worked for the employer asyour most recent one-year period of service.

Years of ServiceFor purposes of figuring your exclusion al-lowance, your years of service depend onyour employment status with the employerwho maintains the TSA plan for the currenttax year and earlier tax years. How you figureyour years of service depends on whetheryou were a full-time or a part-time employee,whether you worked for the full year or onlypart of the year, and whether you have

worked for your employer for one year.

DefinitionYour years of service are the total number ofyears you worked for your employer figuredas of the end of the tax year for which youare figuring an exclusion allowance. Theservice need not be continuous.

Rules for FiguringTake the following rules into account whenfiguring your years of service.

Less than one year of total service. Youryears of service cannot be less than one year.If at the end of your tax year, you have less

than one year of service (including service inany previous years), figure your exclusion al-lowance as if your years of service is oneyear.

Status of employer. Your years of servicewill only include periods during which youremployer was a qualified employer, definedearlier.

Service with one employer. Generally, youcannot count service for any other employer.

Church employee. If you are a churchemployee, treat all of your years of servicewith related church organizations as years ofservice with one employer. If during your

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church career you transfer from one organ-ization to another within that church or to anassociated organization, treat all this serviceas service with a single employer. Whenthese organizations make contributions toyour TSA contracts, treat them as made bythe same employer.

A church employee is anyone who is anemployee of a church or a convention or as-sociation of churches. This includes an em-ployee of a tax-exempt organization con-trolled by or associated with a church or aconvention or association of churches.

Self-employed ministers. If you are a self-employed minister, your years of service in-clude full and part years in which you havebeen treated as employed by a qualified tax-exempt organization.

Full-time employee for full year. Counteach full year during which you were em-ployed full-time as one year of service. Indetermining whether you were employed full-time, compare the amount of work you wererequired to perform with the amount of worknormally required of others who held thesame position with the same employer andwho generally received most of their pay fromthe position.

How to compare. You can use anymethod that reasonably and accurately re-flects the amount of work required. For ex-ample, if you are a teacher, you can use thenumber of hours of classroom instruction asa measure of the amount of work required.

In determining whether positions with thesame employer are the same, consider all ofthe facts and circumstances concerning thepositions, including the work performed, themethods by which pay is determined, and thedescriptions (or titles) of the positions.

Example. An assistant professor em-ployed in the English department of a univer-sity will be considered a full-time employee ifthe amount of work that he is required to

perform is the same as the amount of worknormally required of assistant professors ofEnglish at that university who get most of theirpay from that position.

If no one else works for your employer inthe same position, compare your work withthe work normally required of others who heldthe same position with similar employers orsimilar positions with your employer.

Full year of service. A full year of servicefor a particular position means the usual an-nual work period of anyone employed full-timein that general type of work at that place ofemployment.

Example. If a doctor works for a hospital12 months of a year except for a one-month

vacation, the doctor will be considered asemployed for a full year if the other doctorsat that hospital also work 11 months of theyear with a one-month vacation. Similarly, ifthe usual annual work period at a universityconsists of the fall and spring semesters, aninstructor at that university who teaches thesesemesters will be considered as working a fullyear.

Part-time or employed only part of year.You include a fraction of a year of service foreach year during which you were a full-timeemployee for part of the year or a part-timeemployee for the entire year or for a part ofthe year.

Full-time for part of year. If you workedfull time for part of the year, you figure thefraction of a year of service to include by di-viding the number of weeks (or months) dur-ing which you were a full-time employee bythe number of weeks (or months) consideredthe usual annual work period for the positionyou held.

Example. If you were employed full timeas an instructor by a university for the 1999spring semester (which lasts from February1999 through May 1999) and the academic

year of the university is 8 months long, (fromOctober 1998 through May 1999), you com-pleted 4/8 of a year of service.

Part-time for full year. If you worked parttime for a full year, you figure the fraction ofa year of service to include by dividing theamount of work required of you by the amountof work normally required of someone holdingthe same position on a full-time basis. Youcan use any method that reasonably and ac-curately reflects the amount of work required.You can use the number of hours of class-room instruction as a measure of the amountof work required.

Example. A practicing physician teachesone course at a local medical school 3 hoursper week for two semesters. Other facultymembers at the same school teach 9 hoursper week for two semesters. The practicingphysician is considered as having completed3/9 of a year of service.

Part-time for part of year. If you workedpart time for part of the year, you figure thefraction of a year of service to include bymultiplying two fractions. Figure one fractionas if you worked full time for part of the yearand figure the other fraction as if you workedpart time for the full year.

Example. An attorney teaches a coursefor 3 hours per week for one semester at alaw school. The full-time instructors at that

law school teach 12 hours per week for twosemesters. The fractional part of a year ofservice for the part-time instructor is com-puted as follows:

1) The fractional year of service if the in-structor was a part-time employee for afull year is 3/12 (number of hours em-ployed divided by the usual number ofhours of work required for that position).

2) The fractional year of service if the in-structor was a full-time employee for partof a year is 1/2 (period worked or onesemester, divided by usual work period,or 2 semesters).

These fractions are multiplied to obtain the

fractional year of service: 3/12 times 1/2, or3/24 (1/8).

Amounts PreviouslyExcludableTo figure your exclusion allowance, you mustknow the amounts previously excludable fromyour income.

DefinitionAmounts previously excludable is the total ofall contributions for retirement benefits madefor you by your employer that you could ex-clude from your gross income. It does not in-

clude amounts for the tax year for which thecurrent exclusion allowance is being figured.

Amounts previously excludable includecontributions in earlier years by your em-ployer to:

A tax-sheltered annuity (TSA) plan,

A qualified annuity plan or a qualifiedpension, profit-sharing, or stock bonustrust,

A qualified bond-purchase plan,

A retirement plan under which the contri-butions originally were excludable by youonly because your rights to the contribu-tions were forfeitable when made, andwhich also were excludable by you whenyour rights became nonforfeitable (Thisdoes not apply to contributions made af-ter 1957 to purchase an annuity contractif your employer was an exempt organ-ization when the contributions weremade.), or

An eligible deferred compensation plan(under Code section 457) of a state orlocal government or tax-exempt organ-ization, even if maintained by a separateemployer.

You must treat contributions to a stateteachers retirement system made for you inearlier tax years, up to the amount that wasexcludable, as amounts previouslyexcludable.

You must treat employer contributions andother additions in earlier years (beginning af-ter January 24, 1980) that were more than thelimit as if they were amounts previouslyexcludable. See Limit on Employer Contribu-tions, earlier.

How To FigureIf you do not know the amount that an em-ployer contributed to a plan on your behalf,you can figure your part of your employer'scontributions by any method using recognizedactuarial principles that are consistent withyour employer's plan and the method usedby your employer for funding the plan. Youcan also use the following formula.

Formula. Determine the contributions youremployer made for you as of the end of anytax year by multiplying the following fouritems.

1) The projected annual amountof yourpension (as of the end of the tax year)to be provided at normal retirement agefrom employer contributions, based onthe plan provisions in effect at that timeand assuming your continued employ-ment with that employer at your then

current salary rate.

2) The value from Table Ibased on thenormal retirement age as defined in theplan.

3) The amount from Table II for the sumof the following two items:

a) The number of years remainingfrom the end of the tax year tonormal retirement age, and

b) The lesser of the number of yearsof service credited through the endof the tax year or the number ofyears that the plan has been in ex-istence at that time.

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4) The lesser ofthe number of years ofservice credited through the end of thetax year or the number of years that theplan has been in existence at that time.

An example of the use of this formula followsTable Iand Table II.

Note: If the normal form of retirementbenefit under the plan is other than astraight-life annuity, divide the value fromTable I by the appropriate figure as follows:

The term cash refund refers to a refundof accumulated employer contributions, not toa refund of employee contributions only, oftenreferred to as modified cash refund.

Example. Joe Blue, who was 29 at theend of 1999, has been employed by the OakCounty school system since 1996. In 1996,Joe's employer contributed to a TSA plan onhis behalf. Since 1996, Joe's employer hascontributed to both the TSA plan and astatewide retirement system that provides astraight-life annuity upon retirement. Joe iscovered by both plans.

Joe wishes to figure the amounts previ-ously excludable under both plans so that hecan figure the exclusion allowance for 1999.His employer's contributions to the statewideretirement system were not allocated amongthe individual employees.

Joe's employer gives him the followinginformation:

Employer contributions to the TSA planthat were excludable from gross income inprior years:

The projected annual amount of Joe'sretirement system pension (as of the end of1998 when Joe was 28) is $12,000. Thepension begins at age 65 from his employer'scontributions. This is based on 1998 planprovisions and assumes that Joe works forthe same employer until age 65 at his 1998salary. Normal retirement age is 65.

Joe figures the amounts previouslyexcludable under the pension plan as follows:

Table II

Joe multiplies (1) times (2) times (3) times(4).

$12,000 x 8.08 x .0039 x 3 = $1,134.43Joe then adds his employer's contributions

to the pension plan ($1,134.43) to theexcludable contributions to the TSA plan inyears prior to the 1999 tax year ($7,200) todetermine the amounts previously excludableof $8,334.43.

Note: See Contributions in excess of

employer limit, earlier, under Limit on Em-ployer Contributions.

Comprehensive ExampleThe following example demonstrates how touse Worksheets 1, 2, and 3 to determine theamount of elective deferrals excludable fromgross income for the current tax year. Sincethe smallest of the three limits is your limit forthe year, first determine the amount of eachlimit and then compare the limits to one an-other. The worksheets at the end of thispublication will help you determine the limitamounts.

Example. At the end of 1999, you hadcompleted 3 years of service with your em-ployer. Your salary for 1999 was $32,000 af-ter being reduced under a revocable salaryreduction agreement by $3,600 to financeyour employer's contributions toward thepurchase of a TSA contract for you. Yourelective deferrals for the year totaled $3,600,$100 of which was for current term life insur-ance protection. Remember, your electivedeferrals are considered employer contribu-tions.

In previous years, your elective deferralsto the regular retirement plan totaled $7,200,all of which you properly excluded from grossincome.

First, figure your exclusion allowance (theamount excludable from gross income) andthe amount of any employer contributions

includible in your gross income for 1999 asfollows:

4. Lesser ofyears of plan existence oryears of service .................................... 3

[Level annual contribution which will accu-mulate to $1.00 at the end of a number ofyears.]

Numberof years Amount

Numberof years Amount

1 .......... $1.0000 26 ........ $ .01252 .......... .4808 27 ........ .01143 .......... .3080 28 ........ .0105Table I4 .......... .2219 29 ........ .0096

[Value at normal retirement ages of annuity of$1.00 per year payable in equal monthly install-ments during the life of the employee.]

5 .......... .1705 30 ........ .00886 .......... .1363 31 ........ .0081

7 .......... .1121 32 ........ .0075Ages Value 8 .......... .0940 33 ........ .006940 ................................................................. 11.49

9 .......... .0801 34 ........ .006341 ................................................................. 11.4010 ........ .0690 35 ........ .005842 ................................................................. 11.3111 ........ .0601 36 ........ .005343 ................................................................. 11.2212 ........ .0527 37 ........ .004944 ................................................................. 11.12

45 ................................................................. 11.01 13 ........ .0465 38 ........ .004546 ................................................................. 10.91 14 ........ .0413 39 ........ .004247 ................................................................. 10.79 15 ........ .0368 40 ........ .003948 ................................................................. 10.68

16 ........ .0330 41 ........ .003649 ................................................................. 10.5617 ........ .0296 42 ........ .003350 ................................................................. 10.4318 ........ .0267 43 ........ .003051 ................................................................. 10.3019 ........ .0241 44 ........ .002852 ................................................................. 10.18

53 ................................................................. 10.04 20 ........ .0219 45 ........ .002654 ................................................................. 9.89 21 ........ .0198 46 ........ .002455 ................................................................. 9.75 22 ........ .0180 47 ........ .002256 ................................................................. 9.60

23 ........ .0164 48 ........ .002057 ................................................................. 9.4424 ........ .0150 49 ........ .0019

58 ................................................................. 9.28 25 ........ .0137 50 ........ .001759 ................................................................. 9.1360 ................................................................. 8.9661 ................................................................. 8.7962 ................................................................. 8.6263 ................................................................. 8.4464 ................................................................. 8.2565 ................................................................. 8.0866 ................................................................. 7.8867 ................................................................. 7.7068 ................................................................. 7.5069 ................................................................. 7.2970 ................................................................. 7.1071 ................................................................. 6.8872 ................................................................. 6.6873 ................................................................. 6.4674 ................................................................. 6.2575 ................................................................. 6.0376 ................................................................. 5.8277 ................................................................. 5.61

78 ................................................................. 5.4079 ................................................................. 5.2080 ................................................................. 4.99

Worksheet 1 Exclusion Allowance

1) Enter your includible compen-sation ............................................. $35,600

2) Percentage limit ............................. 20%1996 ............................................................. $2,0003) Multiply line 1 by line 2 .................. $7,1201997 ............................................................. 2,4004) Enter your years of service 31998 ............................................................. 2,8005) Multiply line 3 by line 4 .................. $21,3606) Enter amounts previously

excludable ..................................... $7,200Annuity for 5 years certain and life there-after ............................................................ 0.97

7) Subtract line 6 from line 5. This isyour exclusion allowance (beforeany reduction for excess contribu-tions) .............................................. $14,160

Annuity for 10 years certain and life there-after ............................................................ 0.90Annuity for 15 years certain and life there-after ............................................................ 0.80Annuity for 20 years certain and life there-after ............................................................ 0.70

Worksheet 2 Limit on Employer Contributions

Step 1 Limit on Employer ContributionsLife annuity with installment refund ........... 0.80

Life annuity with cash refund ..................... 0.75 1) Enter your compensation for theyear ................................................ $35,600

1. Projected annual amountof pensionat normal retirement age (65) .............. $12,000

2) Compensation limit ........................ 25%

3) Multiply line 1 by line 2 .................. $8,9002. Table Ivalue at normal retirement age(65) ....................................................... 8.08 4) Maximum ........................................ $30,000

3. Table IIamount for the sum of:5) Enter the lesser of line 3 or line 4.

This is your limit on employer'scontributions. ............................... $8,900

a) Number of years fromend of the preceding taxyear (1998) to normal re-tirement age (65 minus 28) . 37 Step 2 Contributions in Excess of Employer

Limitb) Plus: Lesser of years ofplan existence or years ofservice ................................ 3 6) Enter your employer's contributions

for the current year (not includingthe cost of life insurance) .............. $3,500

40Table II amount for total of 40 ............. .0039

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7) Enter the limit on employer con-tributions (line 5 above) ............... $8,900

Catch-up Election Alternative Limitsfor Certain EmployeesIf you are an employee of a public school (orpublic school system), a hospital, a homehealth service agency, a health and welfareservice agency, or a church or church-relatedorganization that contributes to a tax-sheltered annuity (TSA) plan for you, you canmake a catch-up election to increase thelimit on your employer's contributions by us-ing one of three alternative limits. See alsoSpecial Election for Church Employees, later.

Home health service agency. This is atax-exempt organization that has been deter-

mined by the Secretary of Health and HumanServices to be a home health agency as de-fined in section 1861(o) of the Social SecurityAct.

Church. For this purpose this includes achurch, convention or association ofchurches, or a tax-exempt organization con-trolled by or associated with a church or aconvention or association of churches.

Alternative limits. There are three alterna-tive limits.

1) The year of separation from servicelimit.

2) The any year limit.

3) The overall limit.

Electing (choosing) a limit. You can electany one of the three limits, but with certainrestrictions, as explained later under Makingthe Election. For example, you cannot makemore than one election and, once an electionis made, it is irrevocable and another alter-native limit cannot be selected in a subse-quent year. However, you can still choose toapply the general rule.

Effect of election. Generally, the election touse either the any year limit, or the year ofseparation limit permits you to exclude from

gross income a larger amount of employercontributions than would have been allowedunder the part of the general rule that limitsemployer contributions to 25% of your com-pensation. If you elect to use the overalllimit, you may be able to exclude a largeramount because you can disregard the ex-clusion allowance (discussed earlier) thatwould otherwise apply.

You make the election to apply one ofthese alternative limits by figuring your taxusing the limit you choose.

Excess contributions. If employer contri-butions are included in your income for a taxyear because they exceed any of these al-

20) Add lines 17 and 19. This is yourlimit on elective deferrals for theyear ................................................ $10,000

ternative limits for that year, the excess re-duces the amount of your exclusion allow-ance for future years, even though the excesshas already been included in your income.

Year of SeparationFrom Service LimitFigure your exclusion allowance as explainedearlier, except, for your years of service,count only the service you performed during

the 10-year period ending on the date ofseparation. Do not use a period longer than10 years even if the 10-year period is lessthan your actual number of years of service.Your amounts previously excludable are theamounts excludable during your most recent10 years of service. All service for your em-ployer performed within the 10-year periodmust be taken into account. You can useWorksheet 4 Year of Separation From Ser-vice Limit Election to determine the amountyou can exclude from income.

Figuring the Limit

For the limitation year (defined under Limiton Employer Contributions, earlier) that endswith or within the tax year you stop workingfor a public school or public school system,hospital, church, or other organization listedabove, you can elect to substitute your ex-clusion allowance (modified as discussedbelow) for the 25% of your compensation limiton employer contributions under the generalrule. See Limit on Employer Contributions,earlier. The $30,000 limit on employer contri-butions still applies. The limit on electivedeferrals also still applies to the extent thecontributions consist of elective deferrals. SeeLimit on Elective Deferrals, earlier.

Limit. Compare this modified exclusion al-lowance to the $30,000 limit on employer

contributions and the limit on elective defer-rals, if it applies. Your year of separation fromservice limit is the smallest of these.

If your employer contributions for the yearare more than the smallest of:

1) Your modified exclusion allowance,

2) $30,000, or

3) The limit on elective deferrals, if it ap-plies,

you must include the excess in gross income.

Example. Frank Green, president of auniversity, plans to retire on December 31,1999, after 20 years of service. His compen-sation for 1999, which was not reduced byany elective deferrals, is $100,000. During the10-year period before the date of separationfrom service, Frank's employer contributed$40,000 to Frank's TSA contract. The contri-butions, which were nonelective, wereexcludable from Frank's gross income. Duringall his years of service, his employer contrib-uted a total of $60,000 that was excludablefrom Frank's gross income. For 1999, Frankelects to have his employer contribute themaximum amount permitted for nonelectiveemployer contributions to his TSA contract.He figures that amount using the year ofseparation from service limit as follows:

8) Subtract line 7 from line 6 (if zeroor less, enter (0)). These are con-tributions in excess of the em-ployer limit . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . $ 0

21) Subtract line 20 from line 4 (if zeroor less, enter (0)). This is your ex-cess elective deferrals for theyear ................................................ $0

Step 3 Amount Excludable From Gross Income

9) Enter your exclusion allowance(Worksheet 1, line 7) ..................... $14,160

10) Enter your limit on electivedeferrals (Worksheet 3, line 20) ... $10,000

11) Enter the least of lines 6, 7, 9, and

10. This is the amount excludablefrom gross income ...................... $3,500Step 4 Amount Includible in Gross Income

12) Enter your employer's contribu-tion for the current year (line 6above) ............................................ $3,500

13) Enter the amount excludablefrom gross income (line 11 above)........................................................ $3,500

14) Subtract line 13 from line 12 (ifzero or less, enter (0)). This is theamount includible in gross in-come .............................................. $0

Worksheet 3 Limit on Elective Deferrals

Step 1 Total Elective Deferrals

1) Enter elective deferrals to TSA

plans for the year under a salaryreduction agreement ...................... $3,600

2) Enter elective deferrals for the yearunder cash or deferred arrange-ments (section 401(k) plans) andsection 501(c)(18) p lans ... .. .. .. .. .. .. . $0

3) Enter elective deferrals for the yearto salary reduction simplified em-ployee pension (SEP) plans and toSIMPLE plans .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. $0

4) Add lines 1, 2, and 3. This is thetotal elective deferrals for the year........................................................ $3,600

Step 2 Increase in Limit for Long Service

Note: If you do not have at least 15 years ofservice with a qualifying organization, skip lines5 through 13, and enter zero (0) on line 14. (See

Increase for 15-year employeesunder Limit onElective Deferrals.)

5) Amount per year of service ........... $5,000

6) Enter your years of service withthe qualifying organization .............

7) Multiply line 5 by line 6 ..................

8) Enter the total of all elective defer-rals for prior years made for you bythe qualifying organization .............

9) Subtract line 8 from line 7 (if zeroor less, enter (0) .................. ..........

10) Maximum increase in limit for longservice ............................................ $15,000

11) Enter all prior year increases inlimit for long service .......................

12) Subtract line 11 from line 10 ........

13) Maximum additional contributions . $3,000

14) Enter the least of lines 9, 12, or 13.This is the increase in limit forlong service ... ... ... ... ... ... ... ... ... ... ... . $0

Step 3 Limit on Elective Deferrals

15) Additional amount ......................... $10,000

16) Add lines 14 and 15 ..................... $10,000

17) Basic allowable amount for 1999 . $10,000

18) Subtract l ine 17 from l ine 16 ... .. .. . $0

19) Enter the lesser of lines 4 and 18 . $0

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Because Frank elected this alternativelimit, and because there are no electivedeferrals, his employer can contribute$30,000 to Frank's TSA contract during theyear of his separation from service withoutmaking an excess contribution.

In Worksheet 1 (below), Frank's unad- justed exclusion allowance is $340,000. InWorksheet 2 (below), employer contributionsto Frank's TSA contract are limited to

$25,000. If it were not for this election, thelimit on employer contributions for Frankwould be $25,000 (Worksheet 2). Instead, thelimit is $30,000.

Any Year LimitFor any limitation year (defined under Limiton Employer Contributions, earlier), you cansubstitute for the 25% of employee's com-pensation limit the smallest of the following

amounts.

1) $4,000, plus 25% of your includiblecompensation for the tax year in whichthe limitation year ends.

2) The exclusion allowance for the tax yearin which the limitation year ends.

3) $15,000.

If you elect this limit, the maximum per-mitted contribution to your TSA plan is$15,000, not the $30,000 that may apply un-der other limits.

If your employer annual contributions aremore than the smallest of:

Worksheet 4 Year of Separation From ServiceLimit Election

1) Your any year limit,

2) The exclusion allowance, or

3) The limit on elective deferrals (to theextent the contributions are electivedeferrals),

you must include the excess in your grossincome. To figure the excluded amount usingthe any year limit, use Worksheet 5.

Example. Bill Black is a principal with theMaple County school system. In 1999, his

17th year of service, Bill's salary is $39,000without reduction for an amount under a sal-ary reduction agreement. Bill's employer hadcontributed $34,400 to the TSA plan in earlieryears and all the contributions were excludedfrom Bill's income. Under a salary reductionagreement, Bill and his employer agree toelective deferral contributions of $9,000 thatmay be excluded from Bill's gross income.To find the maximum employer contributionallowed, Bill figured the any year limit asfollows:

Under this alternative limit, Bill's employercan contribute $13,750 to the TSA plan.

Bill's exclusion allowance is $98,200. Themaximum amount the employer can contrib-ute on Bill's behalf is $13,750. Since the$9,000 contribution is less than the tentativelimit, the exclusion allowance, and the maxi-mum limit, $9,000 can be excluded from Bill'sgross income.

If it were not for the alternative limit (theany year limit), the maximum amount Bill'semployer could contribute under the generalrule would be $9,750 (the lesser of $30,000or $9,750 (25% $39,000)). See also Exam-ples of Catch-up Elections, later.

Overall LimitYou can elect to have the limit on your em-ployer contributions and your exclusion al-lowance be equal to the lesser of $30,000 or25% of compensation (as defined under Limiton Employer Contributions, earlier) for thelimitation year ending in the tax year. Underthis election, you disregard the computationof the exclusion allowance. To determine theamount excluded under the overall limit useWorksheet 6 Overall Limit Election.

Include in your gross income any contri-bution to your TSA contract that is more thanthe lesser of:

The limit on employer contributions($30,000 or 25% of compensation), or

The elective deferral limit ($10,000), if itapplies.

If you elect the overall limit as your al-ternative limit, you must combine employercontributions to your TSA plan with your em-

ployer's contributions to a qualified plan todetermine whether the limits on employercontributions have been exceeded. See Limiton Employer Contributions to More Than OnePlan, later.

Example. Mary White is employed as anurse with Apple City General Hospital. In her11th year of service, she agrees to have heremployer contribute additional amounts to herTSA plan for catch-up contributions.

Her compensation for 1999 is $35,000.She figures the overall limit on contributionsto be $8,750, as follows:

Examples of Catch-upElectionsThe following examples show how you canuse the three alternative limits just discussedto maximize the amount of employer contri-butions to a TSA plan that you can excludefrom income.

Example 1. Eli Green was an employeeof Maple Hospital, a tax-exempt charitableorganization, for the entire 1999 calendaryear. His employer's contributions to a TSAplan for him are not subject to the electivedeferral limit. Eli has a salary of $30,000 forthe year. He has 4 years of service with hisemployer as of December 31, 1999. DuringEli's prior service with Maple Hospital, hisemployer had contributed $12,000 on Eli'sbehalf to a TSA plan, and Eli excluded theamount from gross income in earlier years.Thus, for 1999, Eli's exclusion allowance is$12,000, figured as follows:

The limit under the general rule is $7,500(the lesser of $30,000 or $7,500 (25% $30,000)).

Without the catch-up elections providedfor certain employees, $7,500 would be themaximum contribution Maple Hospital couldmake for TSA contracts on behalf of Eli for

Step 1 Limit on Employer Contributions


2) Percentage limit ............................. 20%3) Multiply line 1 by line 2 .................. $20,0004) Enter your years of service (lim-

ited to 10 years) . . .. .. .. .. .. .. .. .. .. .. .. .. .. . 105) Multiply line 3 by line 4 .................. $200,0006) Enter amounts previously

excludable during 10 years (in-cluding prior year excess contribu-tions) .............................................. $40,000

7) Subtract line 6 from line 5. This isyour exclusion allowance ............ $160,000

8) Maximum ........................................ $30,0009) Enter the lesser of line 7 or line 8.

This is the year of separation fromservice limit on employer contri-butions .......................................... $30,000

Worksheet 5 Any Year Limit ElectionWorksheet 6 Overall Limit Election

Step 1 Limit on Employer ContributionsStep 1 Limit on Employer Contributions

1) Enter your compensation for the

year ................................................ $39,000

1) Enter your compensation for the

year ................................................ $35,0002) Percentage ..................................... 25%2) Percentage ..................................... 25%3) Multiply line 1 by line 2 .................. $8,750

3) Multiply line 1 by line 2 .................. $9,7504) Maximum ........................................ $30,000

4) Additional amount .......................... $4,000 5) Enter the lesser of line 3 or line 4.This is the overall limit on em-ployer contributions .................... $8,750

Worksheet 1 Exclusion Allowance5) Add lines 3 and 4. This is a tenta-

tive limit ........................................ $13,7501) Enter your includible compen-

sation ............................................. $100,0006) Enter your includible compen-

sation ............................................. $39,0002) Percentage limit ............................. 20%3) Multiply line 1 by line 2 .................. $20,0004) Enter your years of service .......... 20 7) Percentage limit ............................. 20%5) Multiply line 3 by line 4 .................. $400,000

8) Multiply line 6 by line 7 .................. $7,8006) Enter amounts previouslyexcludable ..................................... $60,000 9) Enter your years of service .......... 17


10) Multiply line 8 by line 9 ................. $132,600

11) Enter amounts previouslyexcludable ..................................... $34,400

12) Subtract line 11 from line 10. This

is your exclusion allowance . .. .. .. . $98,200Worksheet 2 Limit on Employer ContributionsStep 1 Limit on Employer Contributions 13) Maximum ...................................... $15,000

1) Enter your compensation for theyear ................................................ $100,000 14) Enter the least of lines 5, 12, or 13.

This is the any year limit on em-ployer contributions .................... $13,750

2) Compensation limit ........................ 25%3) Multiply line 1 by line 2 .................. $25,0004) Maximum ........................................ $30,0005) Enter the lesser of line 3 or line 4.

This is the limit on employercontributions ................................ $25,000

Worksheet 1 Exclusion Allowance1) Enter your includible compen-

sation ............................................. $30,0002) Percentage limit ............................. 20%3) Multiply line 1 by line 2 .................. $6,0004) Enter your years of service .......... 45) Multiply line 3 by line 4 .................. $24,0006) Enter amounts previously

excludable ..................................... $12,0007) Subtract line 6 from line 5. This is

your exclusion allowance (beforeany reduction for excess contribu-tions) .............................................. $12,000

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1999 without increasing Eli's gross income forthat year.

Since Eli is an employee of a hospital, hecan elect one of the catch-up limits. Eli canelect either the any year limit or the overalllimit. He cannot elect the year of separationfrom service limit since he does not separatefrom service in 1999.

If Eli elects the any year limit, MapleHospital could contribute $11,500 on his be-half for 1999 to a TSA plan, figured as follows:

If Eli elects the overall limit, Maple Hos-pital could contribute only a maximum of$7,500 without increasing Eli's gross incomefor the year figured as follows:

Example 2. Assume the same facts asin Example 1, except that Maple Hospitalcontributed $18,000 on Eli's behalf in earlieryears to the TSA plan. The contributions wereexcludable from his gross income. Thus, for1999, Eli's exclusion allowance is $6,000 fig-ured as follows:

The limit under the general rule (the limiton employer contributions) for 1999 is thelesser of $30,000 or $7,500 (25% $30,000).

Without the catch-up elections, $6,000(the lesser of the two limits that apply) wouldbe the maximum amount Maple Hospitalcould contribute on Eli's behalf for TSA con-tracts without increasing Eli's gross income.

However, if Eli elects the overall limit, MapleHospital could contribute up to $7,500 withoutincreasing Eli's gross income for 1999. Thisis because the overall limit election substi-tutes the 25%-of-compensation limit underthe general rule for the exclusion allowance.

Example 3. Bob White, a teacher, isemployed by Elm School, a tax-exempt publicschool. Bob has a salary of $49,000, of which$5,000 is elective deferrals under a TSA planfor 1999.

Bob has 20 years of service with ElmSchool as of May 30, 1999, the date he sep-arates from the service of Elm School. DuringBob's service with Elm School before tax year1999, Elm School had contributed electivedeferrals of $68,000 toward the purchase ofTSA contracts on behalf of Bob. The amountwas excludable from his gross income for theprior years. Of this amount, $38,000 wascontributed and excluded during the 10-yearperiod ending on May 30, 1999. Bob's elec-tive deferrals limit is increased because hehas completed at least 15 years of service.For the tax year 1999, Bob's limit on electivedeferrals is $13,000 determined as follows:

Bob's limit on employer contributions is$12,250 determined as follows:

Bob's exclusion allowance is $128,000figured as follows:

Bob's limit under the general rule (limit onemployer contributions) is the lesser of$30,000 or $12,250 (25% x $49,000).

Without the catch-up elections, $12,250would be the maximum excludable contribu-tion Elm School could make to a TSA planon Bob's behalf for 1999. This is the least ofthe three limits:

The exclusion allowance ($128,000),

The employer contribution limit, using thegeneral rule ($12,250), or

The increased elective deferral limit($13,000).

However, because Bob was a publicschool employee and has separated fromservice, he can elect any one of the threecatch-up elections (alternative limits) to in-crease his allowable 1999 contribution.

Before deciding which catch-up electionto make, Bob considers the following.

If Bob elects the year of separation fromservice limit (Worksheet 4) for 1999, ElmSchool could contribute up to $30,000 for thatyear without increasing Bob's gross income,figured as follows:

21) Subtract line 20 from line 4 (if zeroor less, enter (0)). This is your ex-cess elective deferrals for theyear ................................................ $0

Worksheet 2 Limit on Employer ContributionsStep 1 Limit on Employer Contributions

1) Enter your compensation for theyear ................................................ $49,000

2) Compensation limit ........................ 25%3) Multiply line 1 by line 2 .................. $12,250

Worksheet 5 Any Year Limit Election 4) Maximum ........................................ $30,0005) Enter the lesser of line 3 or line 4.

This is the limit on employercontributions ................................ $12,250

Step 1 Limit on Employer Contributions

1) Enter your compensation for theyear ................................................ $30,000

2) Percentage ..................................... 25%

3) Multiply line 1 by line 2 .................. $7,500

4) Additional amount .......................... $4,000 Worksheet 1 Exclusion Allowance1) Enter your includible compen-

sation ............................................. $49,0005) Add lines 3 and 4. This is a tenta-

tive limit ........................................ $11,5002) Percentage limit ............................. 20%


3) Multiply line 1 by line 2 .................. $9,8004) Enter your years of service .......... 205) Multiply line 3 by line 4 .................. $196,0007) Percentage limit ............................. 20%6) Enter amounts previously

excludable ..................................... $68,0008) Multiply line 6 by line 7 .................. $6,000


9) Enter your years of service .......... 4

Worksheet 3 Limit on Elective Deferrals10) Multiply line 8 by line 9 ................. $24,000

Step 1- Total Elective Deferrals11) Enter amounts previouslyexcludable ..................................... $12,000 1) Enter elective deferrals to TSAplans for the year under a salaryreduction agreement ...................... $5,000

12) Subtract line 11 from line 10. Thisis your exclusion allowance . .. .. .. . $12,000

2) Enter elective deferrals for the yearunder cash or deferred arrange-ments (section 401(k) plans) andsection 501(c) (18) plans . ... ... ... ... ... 0

13) Maximum ...................................... $15,000

14) Enter the least of lines 5, 12, or 13.This is the any year limit on em-ployer contributions .................... $11,500

3) Enter elective deferrals for the yearto salary reduction simplified em-ployee pension (SEP) plans and toSIMPLE plans ... .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 0

4) Add lines 1, 2, and 3. This is yourtotal elective deferrals for the year........................................................ $5,000Worksheet 6 Overall Limit Election

Step 1 Limit on Employer Contributions Step 2 Increase in Limit for Long Service1) Enter your compensation for the

year ................................................ $30,000 Note: If you do not have at least 15 years ofservice with a qualifying organization, skip lines5 through 13, and enter zero (0) on line 14. (SeeIncrease for 15-year employeesunder Limit onElective Deferrals.)

2) Percentage ..................................... 25%3) Multiply line 1 by line 2 .................. $7,5004) Maximum ........................................ $30,0005) Enter the lesser of line 3 or line 4.

This is the overall limit on em-ployer contributions .................... $7,500

5) Amount per year of service ........... $5,000

6) Enter your years of service withthe qualifying organization ... .. .. .. .. .. 20

7) Multiply line 5 by line 6 .................. $100,000

8) Enter the total of all elective defer-rals for prior years made for you bythe qualifying organization ............. $68,000

9) Subtract line 8 from line 7 (if zeroor less, enter (0)). .......................... $32,000

10) Maximum increase in limit for longservice ............................................ $15,000Worksheet 1 Exclusion Allowance Worksheet 4 Year of Separation From Service

Limit Election1) Enter your includible compen-sation ............................................. $30,000 11) Enter all prior year increases in

l imit for long service ... .. .. .. .. .. .. .. .. .. .. 0 Step 1 Limit on Employer Contributions2) Percentage limit ............................. 20%

3) Multiply line 1 by line 2 .................. $6,000 12) Subtract line 11 from line 10 ........ $15,000 1) Enter your includible compe

Documents

US Internal Revenue Service: p571--1999