Wise Cracks Commentary with Dan and John Ding Dong the MEA Witch is Almost Dead     Advent calendars were always big at our houses growing up. We couldn't wait to open those doors and get those treats because it meant one thing — a bonanza of presents was coming at the end of the month. An extra special treat awaits 403(b) investors this holiday season courtesy of the Economic Growth and Tax Relief Reconciliation Act of 2001 — the elimination of the horribly complicated Maximum Exclusion Allowance (MEA).   What's the big deal? The MEA is one part, albeit one nasty part, of the maximum amount contributable (MAC) calculation. In English this means how much you can contribute to a 403(b) in a given year. As it now stands, in order to figure exactly how much you can contribute to your 403(b) plan you must figure the three parts of the MAC. The MEA is the first and most complicated calculation. It requires participants to factor in years of service, includable compensation (salary), and prior tax-deferred contributions by the employee. Participants of 401(k) plans aren't required to do this. Needless to say factoring the MEA requires a lot of detailed record keeping from years past many of us don't have.   MEA calculation errors have led to scores of liability issues for employers. In fact, many believe the MEA is directly responsible for the equally repressive hold harmless agreement. This is a contract many unWise school districts impose on vendors wishing to sell product. Insurance companies usually sign these "agreements," while no-load mutual fund companies balk at the repressive wording which often holds vendors liable for actions they have no control over. Talk about your Scrooges! It is believed that insurance companies gladly sign these agreements because their higher fee structure (often 2% higher than no-load mutual funds) makes the risk more worthwhile. The result is that employees of school districts are usually stuck with only high-fee insurance annuity products to "choose" from.   So what will the new MAC look like without the MEA? How about something remarkably similar to the 401(k). Beginning January 1, 2002, new maximum amount contributable (MAC) rules allow participants to contribute:   1. the new elective deferral limit of $11,000 (going up to $12,000 in 2003), or   2. up to 100% of compensation (must be less than the elective deferral limit), or   3. for those with employer matches, limits are $40,000 or 100% of compensation (lesser amount).   4. in addition, if you are 50 or older at any time during 2002, you may contribute an additional $1,000.     Pretty simple stuff. Additionally, the special 15 years of service catch-up election — which allows participants with 15 years of service with the same employer (need not be consecutive) to increase their contributions by an additional $3,000 annually ($15,000 lifetime maximum) — will remain in place. Calculating this election, unfortunately, is still anything but simple. It is highly recommended that you consult a tax professional when figuring this calculation.   Will all school districts now suddenly Wise up and retool, or outright eliminate, the hold harmless agreement? Don't count on it — yet. At the very least, figuring MAC calculations — with the exception of the old 15 years of service catch-up election — will be a whole lot easier in 2002, and for that 403(b) participants might want to crack open an extra bottle of champagne this holiday season. As if you needed any prodding.     Home | Disclaimer | © 2001 403(b)wise. All rights reserved.				Back to the latest Wise Cracks