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Anyone out there have experience with using "Special Election B: Any Year Limit" for calculating 403(b) contribution limits? I just came across this in a Vanguard booklet and think it would apply to my wife's situation. Here's the background:

Wife taught full time in public school during school year 1999-2000 and converted to half time teaching with the beginning of current school year. She had been contributing the $10,500 limit to her 403(b) account with T. Rowe Price. In calendar year 2001 her gross income will only be about $29,000. Under the normal annual additions limitation she could only contribute 25% of her gross or $7250.

According to the Vanguard booklet, under special election B, the annual additions limit "is replaced by an alternative limit that is the least of the following three amounts:

25% of gross compensation plus $4,000

Maximum exclusion allowance (would be $17,200)


This would give an annual additions limit of $11,250 ($7250+$4000).

Then we revert back to the three basic limits and take the lowest, which would be the Elective deferral limit of $10,500. So I think she can still contribute $10,500 for calendar year 2001 even though her salary has been cut in half. Is this correct?

Her school system payroll office doesn't seem to understand the 403b regulations very well. They cut her most recent contribution to 25% of her CURRENT school year salary. Her calendar year gross for 2000 will be enough to allow the full $10,500. I've written a letter to the head of payroll and their lawyer explaining that all limit calculations are to be based on total calendar year gross pay but they claim their payroll program has the 25% or current salary built in. Arrgh!

I don't relish the prospect of trying to explain Special Election B to them. Any suggestions?

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dave -

It would be nice if your 403b(7) plan vendor could help... but you don't have a person on-site to act as your advocate!

I work extensively in the 403b marketplace, and I often compute the "Maximum Exclusion Allowance" (MEA) for clients who want to maximize their contributions.

The normal cap is 20% of compensation, or $10,500/year, whichever is less. The alternative limit you refer to may be the "Catch-Up Provision" designed to permit employees of 15+ years to make up for lost opportunity. The maximum allowed by this catch-up provision is $3,000. Hence the greatest amount permitted in any tax year is $13,500 (for those who qualify). Hope this helps...

If you feel really brave, go to the IRS website, and look up Publication 571, which is too big to attach (24 pages), and can be opened with Adobe Acrobat Reader. If I can help any further, let me know.

Good luck, PP
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