403(b) Plans

  • A 403(b) 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.

    • What is 403(b) plan?

      The features of a 403(b) are very similar to those of a 401(k). Employees may make salary deferral contributions that are usually limited by regulatory caps. Individual accounts in a 403(b) can be any of the following types:

      • An annuity contract, which is provided through an insurance company
      • A custodial account, which is invested in mutual funds
      • A retirement income account set up for church employees

      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.

      To view the differences between 403(b) and 401(k) plans click here.

    • What are the benefits of a 403(b)?

      The following are advantages of maintaining a 403(b) plan or account:

      • For the employer:
        Attractive benefits that help keep high-quality employees happy
      • A shared cost of funding between employers and employees (in some cases, only employees contribute to the 403(b))

      For the employee:

      • Reduced taxable income through pre-tax contributions
      • Tax-deferred earnings on plan contributions (If the contributions are made to a Roth 403(b) account, earnings can be tax-free.)
      • The likelihood of paying less tax on assets, as distributions usually occur during retirement, when an employee may be in a lower tax bracket
      • The ability to take loans from the 403(b) accounts
    • Who may establish a 403(b)?

      A 403(b) may be established by any of the following organizations:

      • A tax-exempt organization established under section 501(c)(3) of the Internal Revenue Code — these organizations are usually referred to as section 501(c)(3) organizations
      • Public school systems
      • Cooperative hospital service organizations
      • Uniformed Services University of the Health Sciences
      • Public school systems organized by Native American tribal governments
      • Certain ministers

      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.

    • Who may participate in a 403(b)?

      Eligible employees of the following organizations may participate in the 403(b) plan maintained by the organization:

      • A tax-exempt organization established under section 501(c)(3) of the Internal Revenue Code – these organizations (see note below) are usually referred to as section 501(c)(3) organizations
      • Public school systems
      • Cooperative hospital service organizations
      • Uniformed Services University of the Health Sciences (USUHS)
      • Public school systems organized by Native American tribal governments
      • Certain ministers
    • How do I start a 403(b)?

      An employer must adopt a written plan that defines the terms of the 403(b). The written plan serves to facilitate the allocation of responsibilities among:

      • The employer
      • The issuer of the 403(b) account or annuity and
      • Any other parties involved in implementing the plan

      It 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 it 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 funding 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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