4044 / What is includable compensation for purposes of the Section 403(b) contribution limits?
In the case of a 403(b) annuity contract, “participant’s compensation” means the participant’s includable compensation determined under IRC Section 403(b)(3).1 Includable compensation is based on compensation earned by the employee for the most recent period, ending not later than the close of the taxable year for which the limitation is being determined, that constitutes a full year of service and that precedes the taxable year by no more than five years.2
Thus, for a full-time employee, includable compensation generally is the employee’s salary for the current taxable year. For a part-time employee, fractional year earnings are required to be aggregated.3 To illustrate, assume that as of the end of 2024, an employee had worked three years half-time and had the following earnings: $11,500 in 2022, $12,000 in 2023, and $12,500 in 2024. In computing the employee’s exclusion allowance for 2024, the employee’s includable compensation would be $24,500 ($12,000 + $12,500).
The definition of includable compensation includes any elective deferrals ( Q 4047) made to the plan and any amount that has been contributed or deferred by the employer at the election of the employee and that is not includable in gross income by reason of IRC Section 125, IRC Section 132(f)(4), or IRC Section 457 (see Q 3501 concerning cafeteria plans and Q 3581 concerning IRC Section 457 deferred compensation plans).4