Includible Compensation — 0126 Publ 571 (PDF)

After identifying your most recent year of service, the next step is to identify the includible compensation associated with that full year of service.

Includible compensation isn’t the same as income included on your tax return. Compensation is a combination of income and benefits received in exchange for services provided to your employer.

Generally, includible compensation is the amount of income and benefits:

Received from the employer who maintains your 403(b) account, and
It must be included in your income.

Includible compensation includes the following amounts.

Elective deferrals (employer's contributions made on your behalf under a salary reduction agreement).
Amounts contributed or deferred by your employer under a section 125 cafeteria plan.
Amounts contributed or deferred, at the election of the employee, under an eligible section 457 nonqualified

deferred compensation plan (state or local government or tax-exempt organization plan). Note: For information about treating elective deferrals under section 457 plans as Roth contributions, see Pub. 575.

Wages, salaries, and fees for personal services earned with the employer maintaining your 403(b) account.
Income otherwise excluded under the foreign earned income exclusion.
Pre-tax contributions (employer's contributions made on your behalf according to your election) to a qualified transportation fringe benefit plan.

Includible compensation does not include the following items.

Your employer's contributions to your 403(b) account.
Compensation earned while your employer wasn’t an eligible employer.
Your employer's contributions to a qualified plan that:

a. Are on your behalf, and

b. Are excludable from income.

The cost of incidental life insurance. See Cost of Inci- dental Life Insurance, later.

Caution: If you are a church employee or a foreign missionary, figure includible compensation using the rules explained in chapter 5.

Contributions after retirement. Nonelective contributions may be made for an employee for up to 5 years after retirement. These contributions would be based on includible compensation for the last year of service before retirement.

Cost of Incidental Life Insurance

Includible compensation doesn’t include the cost of incidental life insurance.

Caution: If all of your 403(b) accounts invest only in mutual funds, then you have no incidental life insurance.

If you have an annuity contract, a portion of the cost of that contract may be for incidental life insurance. If so, the cost of the insurance is taxable to you in the year contributed and is considered part of your basis when distributed. Your employer will include the cost of your insurance as taxable wages in box 1 of Form W-2.

Not all annuity contracts include life insurance. Contact your plan administrator to determine if your contract includes incidental life insurance. If it does, you will need to figure the cost of life insurance each year the policy is in effect.

Figuring the cost of incidental life insurance. If you have determined that part of the cost of your annuity contract is for an incidental life insurance premium, you

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will need to determine the amount of the premium and subtract it from your includible compensation.

To determine the amount of the life insurance premiums, you will need to know the following information.

The value of your life insurance contract, which is the amount payable upon your death.
The cash value of your life insurance contract at the end of the tax year.
Your age on your birthday nearest the beginning of the policy year.
Your current life insurance protection under an ordinary retirement income life insurance policy, which is the amount payable upon your death minus the cash value of the contract at the end of the year.

You can use Worksheet A in chapter 9 to determine the cost of your incidental life insurance.

Example. Your new contract provides that your beneficiary will receive $10,000 if you should die before retirement. Your cash value in the contract at the end of the first year is zero. Your current life insurance protection for the first year is $10,000 ($10,000 − $0).

The cash value in the contract at the end of year 2 is $1,000, and the current life insurance protection for the second year is $9,000 ($10,000 – $1,000).

The 1-year cost of the protection can be calculated by using Figure 3-1. The premium rate is determined based on your age on your birthday nearest the beginning of the policy year.

Figure 3-1. Table of 1-Year Term Premiums for $1,000 Life Insurance Protection

Age Cost Age Cost Age Cost

0 . . . . $0.70 35 . . . $0.99 70 . . . $20.62 1 . . . . 0.41 36 . . . 1.01 71 . . . 22.72 2 . . . . 0.27 37 . . . 1.04 72 . . . 25.07 3 . . . . 0.19 38 . . . 1.06 73 . . . 27.57 4 . . . . 0.13 39 . . . 1.07 74 . . . 30.18 5 . . . . 0.13 40 . . . 1.10 75 . . . 33.05 6 . . . . 0.14 41 . . . 1.13 76 . . . 36.33 7 . . . . 0.15 42 . . . 1.20 77 . . . 40.17 8 . . . . 0.16 43 . . . 1.29 78 . . . 44.33 9 . . . . 0.16 44 . . . 1.40 79 . . . 49.23 10 . . . 0.16 45 . . . 1.53 80 . . . 54.56 11 . . . 0.19 46 . . . 1.67 81 . . . 60.51 12 . . . 0.24 47 . . . 1.83 82 . . . 66.74 13 . . . 0.28 48 . . . 1.98 83 . . . 73.07 14 . . . 0.33 49 . . . 2.13 84 . . . 80.35 15 . . . 0.38 50 . . . 2.30 85 . . . 88.76 16 . . . 0.52 51 . . . 2.52 86 . . . 99.16 17 . . . 0.57 52 . . . 2.81 87 . . . 110.40 18 . . . 0.59 53 . . . 3.20 88 . . . 121.85 19 . . . 0.61 54 . . . 3.65 89 . . . 133.40 20 . . . 0.62 55 . . . 4.15 90 . . . 144.30 21 . . . 0.62 56 . . . 4.68 91 . . . 155.80 22 . . . 0.64 57 . . . 5.20 92 . . . 168.75 23 . . . 0.66 58 . . . 5.66 93 . . . 186.44 24 . . . 0.68 59 . . . 6.06 94 . . . 206.70 25 . . . 0.71 60 . . . 6.51 95 . . . 228.35 26 . . . 0.73 61 . . . 7.11 96 . . . 250.01 27 . . . 0.76 62 . . . 7.96 97 . . . 265.09 28 . . . 0.80 63 . . . 9.08 98 . . . 270.11 29 . . . 0.83 64 . . . 10.41 99 . . . 281.05 30 . . . 0.87 65 . . . 11.90 31 . . . 0.90 66 . . . 13.51 32 . . . 0.93 67 . . . 15.20 33 . . . 0.96 68 . . . 16.92 34 . . . 0.98 69 . . . 18.70

Caution: If the current published premium rates per $1,000 of insurance protection charged by an insurer for individual 1-year term life insurance premiums available to all standard risks are lower than those in the preceding table, you can use the lower rates for figuring the cost of insurance in connection with individual policies issued by the same insurer.

Example 1. An employee, age 44, and the employer enter into a 403(b) plan that will provide the employee with a $500 a month annuity upon retirement at age 65. The agreement also provides that if the employee should die before retirement, the beneficiary will receive the greater of $20,000 or the cash surrender value in the life insurance contract. Using the facts presented, we can determine the cost of the employee’s life insurance protection as shown in Table 3-1.

The employer has included $28 for the cost of the life insurance protection in the employee’s current-year income. When figuring includible compensation for this year, the employee will subtract $28.

8 Chapter 3 Limit on Annual Additions Publication 571 (1-2026)

Table 3-1.

Worksheet A. Cost of Incidental Life Insurance

Note: Use this worksheet to figure the cost of incidental life insurance included in your annuity contract. This amount will be used to figure includible compensation for your most recent year of service.

1. Enter the value of the contract (amount payable upon your death) . . . . . . . . . . . 1. $20,000.00

2. Enter the cash value in the contract at the end of the year . . . . . . . . . . . . . . . . . . 2. 0.00

3. Subtract line 2 from line 1. This is the value of your current life insurance protection . . . 3. $20,000.00

4. Enter your age on your birthday nearest the beginning of the policy year . . . . . . . . . . 4. 44

5. Enter the 1-year term premium for $1,000 of life insurance based on your age. (From Figure 3-1) . . . . . . . . . . . . . . . . . . . . . 5. $1.40

6. Divide line 3 by $1,000 . . . . . . . . . . . . . 6. 20

7. Multiply line 6 by line 5. This is the cost of your incidental life insurance . . . . . . . . . . 7. $28.00

Example 2. The employee’s cash value in the contract at the end of the second year is $1,000. In year 2, the cost of the employee’s life insurance is figured as shown in Table 3-2.

In year 2, the employer will include $29.07 in the em- ployee’s current-year income. The employee will subtract this amount when figuring the includible compensation.

You can use Worksheet Bin chapter 9 to determine your includible compensation for your most recent year of service.

Example. Max has been periodically working full-time for a local hospital since September 2023. Max needs to figure the limit on annual additions for 2026. The hospital's normal annual work period for employees in Max's general type of work runs from January to December.

During the periods that Max was employed with the hospital, the hospital was always eligible to provide a 403(b) plan to employees. Additionally, the hospital never provided the employees with a 457 deferred compensation plan, a transportation fringe benefit plan, or a cafeteria plan.

Max has never worked abroad and there is no life insurance provided under the plan.

Table 3-3 shows the service Max provided to the em- ployer, compensation for the periods worked, elective deferrals, and taxable wages.

Years of Year

Service

Table 3-3.

Max’s Compensation

Note: This table shows information Max will use to figure includible compensation for the most recent year of service.

Taxable

Wages

Elective Deferrals

Table 3-2.

Worksheet A. Cost of Incidental Life Insurance

1. Enter the value of the contract (amount payable upon your death) . . . . . . . . . . . 1. $20,000.00

2. Enter the cash value in the contract at the end of the year . . . . . . . . . . . . . . . . . . 2. $1,000.00

3. Subtract line 2 from line 1. This is the value of your current life insurance protection . . 3. $19,000.00

4. Enter your age on your birthday nearest the beginning of the policy year . . . . . . . 4. 45

5. Enter the 1-year term premium for $1,000 of life insurance based on your age. (From Figure 3-1) . . . . . . . . . . . . . . . . . . . . 5. $1.53

6. Divide line 3 by $1,000 . . . . . . . . . . . . . 6. 19

7. Multiply line 6 by line 5. This is the cost of your incidental life insurance . . . . . . . . . 7. $29.07

Figuring Includible Compensation for Your Most Recent Year of Service

You can use Worksheet B in chapter 9 to determine your includible compensation for your most recent year of service.

6/12 of 2026 $42,000 $2,000 a year

4/12 of 2025 $16,000 $1,650 a year

4/12 of 2024 $16,000 $1,650 a year

Before figuring the limit on annual additions, Max must figure includible compensation for the most recent year of service.

Because Max isn’t planning to work the entire 2026 year, Max’s most recent year of service will include the time planning to work in 2026 plus time worked in the preceding 3 years until the time worked for the hospital totals 1 year. If the total time worked is less than 1 year, Max will treat it as if it were 1 year. Max figures the most recent year of service shown in the following list.

Time Max will work in 2026 is ⁶ /12 of a year.
Time worked in 2025 is ⁴ /12 of a year. All of this time will be used to determine Max's most recent year of service.
Time worked in 2024 is ⁴ /12 of a year. Max only needs 2 months of the 4 months worked in 2024 to have enough time to total 1 full year. Because Max needs only ¹ /2 of the actual time worked, Max will use only ¹ /2 of income earned during that period to figure wages that will be used in figuring the includible compensation.

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Table 3-4.

Worksheet B. Includible Compensation for Your Most Recent Year of Service ¹

Note: Use this worksheet to figure includible compensation for your most recent year of service.

1. Enter your includible wages from the employer maintaining your 403(b) account for your most recent year of service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. $66,000

2. Enter elective deferrals excluded from your gross income for your most recent year of service ² . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 4,475 ³

3. Enter amounts contributed or deferred by your employer under a cafeteria plan for your most recent year of service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. -0 4. Enter amounts contributed or deferred by your employer according to your election to your 457 account (a nonqualified plan of a state or local government or of a tax-exempt organization) for your most recent year of service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. -0 5. Enter pre-tax contributions (employer's contributions made on your behalf according to your election) to a qualified transportation fringe benefit plan for your most recent year of service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. -0 6. Enter your foreign earned income exclusion for your most recent year of service . . . . . . . . . . . . . 6. -0 7. Add lines 1, 2, 3, 4, 5, and 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 70,475

8. Enter the cost of incidental life insurance that is part of your annuity contract for your most recent year of service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. -0 9. Enter compensation that was both :

Earned during your most recent year of service, and
Earned while your employer wasn’t qualified to maintain a 403(b) plan . . . . . . . . . . . . . . . . . . 9. -0

10. Add lines 8 and 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. -0 11. Subtract line 10 from line 7. This is your includible compensation for your most recent year of service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. 70,475

1 Use estimated amounts if figuring includible compensation before the end of the year.

2 Elective deferrals made to a designated Roth account aren’t excluded from your gross income and shouldn’t be included on this line.

3 $4,475 ($2,000 + $1,650 + $825).

Using the information provided in Table 3-3, wages for Max's most recent year of service are $66,000 ($42,000 + $16,000 + $8,000). Max’s includible compensation for the most recent year of service is figured as shown in Ta- ble 3-4.

After figuring the includible compensation, Max determines the limit on annual additions for 2026 to be $72,000, the lesser of the includible compensation, $70,475 (Table 3-4), and the maximum amount of $72,000.

10 Chapter 3 Limit on Annual Additions Publication 571 (1-2026)