A 403(b) plan is a type of retirement plan for tax-exempt organizations, most employees of public schools, and self-employed religious ministers. Many compare 403(b) plans to 401(k) plans offered by corporations and businesses to their employees.
The features of a 403(b) plan are very similar to those of a 401(k) plan. Employees may make salary deferral contributions that are usually limited by regulatory caps. Individual accounts in a 403(b) plan can be any of the following types:
The employer may determine the financial institution(s) at which individual employees may maintain their 403(b) accounts, which in turn determines the type of 403(b) accounts that the employees may establish and fund.
The following are advantages of maintaining a 403(b) plan or account:
For the employer:
For the employee:
An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes: charity, religion, education, science, literacy, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. To qualify, the organization must be a corporation, community chest, fund or foundation. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify.
The written plan also provides a central document, or collection of documents, which explains the rights of the employees and employee eligibility for participating in the plan, and enables government agencies to determine whether the plan satisfies applicable laws.
If the plan allocates responsibilities for performing administrative functions to other parties, such allocation must identify who is responsible for ensuring compliance with the requirements of the tax code, including compliance requirements for loans and distributions.
In the case of a plan that is funded through multiple financial institutions, the employer may adopt a single written plan to coordinate administration among the financial institutions, rather than having a separate document for each issuer.
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