What Is 403(b) Plan?

A 403(b) plan, or a tax-sheltered annuity (TSA), is an employer-sponsored retirement plan for public schools and other non-profit organizations. Under this annuity contract, employees defer a portion of their paychecks to the account through automatic payroll deductions and employers may match these contributions. The two types of 403(b) plans include:

The tax advantages of each plan often depend on the participant’s current financial status and anticipated tax bracket at retirement.

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Which Institutions Qualify for 403(b) Plans?

Only eligible organizations can offer 403(b) retirement plans. According to the IRS, the following employers can provide this benefit to their workforces:

Eligible Employees

Under the above list, the following employees qualify for 403(b) plans:

403(b) Retirement Plan Rules

Retirement plans are guided by IRS rules and other stipulations unique to the agreement between the employee and employer. Here are some of the key things participants need to know about their 403(b) plan:

Contribution Limits

Participants can only add up to a certain amount each year, and this maximum is routinely adjusted to account for cost-of-living increases. As of 2023, the 403(b) contribution limits are as follows:

Required Minimum Distributions (RMD)

Upon reaching a certain age, traditional 403(b) plan participants are required to withdraw a predetermined amount from their retirement accounts each year. According to the SECURE 2.0 Act, this rule goes into effect at age 73 (if you reach 72 after 12/31/2022).

As of 2024, distribution age rules don’t apply to Roth 403(b) plans.

Vesting Schedule

A plan agreement may include a vesting schedule. Vesting indicates when the employee attains full ownership over the funds in their account. Some plans allow immediate vesting, while others vest funds gradually over time.

Nondiscrimination Testing (NDT)

Nondiscrimination testing (NDT) helps ensure retirement benefits are administered fairly at any given workplace. Not all are subject to testing, but it’s required for non-governmental and non-church 403(b) plans.

Filing and Reporting Requirements

Employers who offer 403(b) plans typically need to file Form 5500 annually. Other reporting and disclosure requirements may apply depending on the benefit plan.

How Is a 403(b) Plan Different from a 401(a) or 401(k) Plan?

Not all employer-sponsored retirement plans are alike. The differences between 403(b) and 401(k) or 401(a) plans are primarily the eligibility requirements and plan structure. Here are some key nuances to note:

401(k) retirement plan

401(a) retirement plan

403(b) retirement plan

Annual deferral limits, reporting requirements, and other plan specifics will also vary.

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