To figure the limit on annual additions under the general rule, you will need to determine what is and is not compensation. Generally, compensation includes:

• Wages, salaries, and fees for personal services with the employer maintaining the plan, even if excludable as foreign earned income,
• Certain taxable accident and health insurance payments,
• Moving expense payments or reimbursements paid by your employer, if such payments are not deductible by you,
• The value of nonqualified stock options granted to you that are includible in your gross income in the year granted,
• Elective deferrals,
• Amounts contributed or deferred (at your election) by your employer under a cafeteria plan or an eligible section 457 plan, and
• The value of qualified transportation fringe benefits.

Generally, compensation does not include:

• Contributions toward a TSA contract (other than elective deferrals),
• Contributions toward a deferred compensation plan if, before applying the limit on employer contributions, the contributions are not taxable,
• Distributions from a deferred compensation plan,
• Proceeds from the disposition of stock acquired under a qualified stock option, and
• Certain other amounts that are excludable from your income, such as group term life insurance premiums that are not taxable.

Note. Compensation for purposes of the limit on annual additions for 2001 is not the same as includible compensation discussed in chapter 3.

Worksheet E. Compensation Calculation - Limit on Annual Additions, in chapter 13, can help you figure your compensation for the limit on annual additions.

Example

Using the same facts presented in the last Example in chapter 3, Jerry is now ready to figure the second component of his MAC, the limit on annual additions.

Figure Jerry's compensation. The first step in determining the limit on annual additions is to figure compensation. Jerry's compensation is shown in Table 4-1.

Figure Jerry's limit on annual additions. After determining compensation, Jerry is now ready to figure the limit on annual additions.

Jerry's limit on annual additions is $9,450 as shown in Table 4-2.

Figuring Jerry's MAC

Jerry has figured both his MEA and his limit on annual additions. To figure his MAC for 2001, Jerry must figure his limit on elective deferrals. This limit is explained in chapter 5.

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