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Figuring Includible Compensation for Your Most Recent Year of Service: 403(b) Retirement Plans (2026 IRS Guide)

This guide covers “Figuring Includible Compensation for Your Most Recent Year of Service” within 403(b) retirement plans. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 571 (01/2026), Tax-Sheltered Annuity Plans (403(b) Plans), published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

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.

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.

You can use Worksheet B in 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 employer, compensation for the periods worked, elective deferrals, and taxable wages.

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.
Year Years of Service Taxable Wages Elective Deferrals
2026 6/12 of
a year		 $42,000 $2,000
2025 4/12 of
a year		 $16,000 $1,650
2024 4/12 of
a year		 $16,000 $1,650

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 ½ of the actual time worked, Max will use only ½ of income earned during that period to figure wages that will be used in figuring the includible compensation.

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 Table 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.

Table 3-4. Worksheet B. Includible Compensation for Your Most Recent Year of Service1

  • 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 service2 2. 4,4753
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 guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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