When Box 12A of your IRS Form W-2, Wage and Tax Statement, has an E in the code box, the amount that follows is the amount of salary you had deferred as allowed by Section 403(b). If you were eligible to catch up on your pension contributions due to a previous year’s military service, Code E will be followed by the year for which you are contributing.
The IRS has limited the allowed deferral amount to $16,500 for most taxpayers in 2010 and 2011. Taxpayers employed for 15 years at the same eligible organizations are able to increase this limit. The employment does not have to be in consecutive years or full time. The IRS provides a formula to determine the number of service years and the effect on the deferral limit in Publication 571.
If the amount deferred into your 403(b) plan, as shown in box 12, does not exceed your limit, you do not need to report it to the IRS on your annual tax return. If the box shows an amount above your limit, the excessive amount is reported on line 7 of IRS Form 1040. If the amount deferred is under the limits, you can file a Form 1040, 1040 A or 1040 EZ depending on your tax situation; a 1040 must be filed if you exceed your deferral limit.
Advantages of 403(b)
A 403(b) plan is a retirement plan -- an annuity contract with an insurance company, account invested in mutual funds or retirement income account -- open to eligible employees. Neither the allowable amounts contributed to the plan nor the interest gained are taxed until taxpayers withdraw them from the account. Certain taxpayers qualify for a tax credit for plan contributions.
403(b) Eligible Employees
Only employees of certain types of organizations are allowed to participate in a 403(b) plan. Eligible taxpayers include those who work for a 501(c) 3, not-for-profit business; cooperative hospital; and most public school employees. Clergy who work for a 501(c) 3 church and are self-employed, or who don’t work for a 501(c) 3 organization but whose regular work requires ministerial duties, also qualify for a 403(b) plan.
Heather Richards is a freelance web writer in Rhode Island. Richards has managed non-profits serving senior citizens and individuals with developmental disabilities for 12 years. She holds a Bachelors of Science degree in Public Administration from UNC Pembroke.