Both employers and employees may make contributions into a 403(b) plan for an employee. However, in most cases, contributions to a 403(b) plan are made from an employee's elective deferrals. The employee signs a salary reduction agreement with the employer, authorizing him or her to reduce a certain amount from the employee's wages. This money is used to purchase an annuity contract or invest in a mutual fund. This annuity or mutual fund is the vehicle in which the 403(b) plan is invested.
The employee signs a salary reduction agreement with the employer, authorizing him or her to reduce a certain amount from the employee's wages.
Before proceeding further, you will need to know what a MAC is.
A MAC (formerly called the exclusion allowance) is the "maximum amount contributable" that can be deferred to the plan free of tax.
Thus, if your MAC is $2,000, up to $2,000 worth of deferrals will be tax-free. Amounts exceeding that will be taxed. The IRSissues regulations and formulas to help compute an individual's MAC for the year.
The individual may elect to defer an amount up to the MAC. This is pre-tax, so no deduction can be taken on a tax return. The employee's W2 will reflect the lower taxable income. Generally, an employee can elect to defer up to $16,500 for 2009 (up from $15,500 for 2008); those over 50 are entitled to defer a "catch-up" of $5,500 for 2009 (up from $5,000 for 2008). However, both elective deferrals and employer contributions may not exceed the lesser of $49,000 in 2009 (up from $46,000 in 2008) or the MAC.
It should be noted that participation in a 403(b) plan qualifies as participation in an employer-sponsored retirement program. This may have consequences for an individual who is putting money into a second retirement plan. Someone who contributes to a tax-deferred annuity plan may not be eligible (depending upon his or her income) to deduct contributions to an individual retirement account.
IRS Publication 571 provides more detailed information on all aspects of 403(b) plans.