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 Employee benefits and employers may match these contributions. The two types of 403(b) plans include:

  • Traditional 403(b) plan: Employees defer a portion of their paychecks to the account before federal or state income tax deductions. This means the money they receive when they retire will be taxed.
  • Roth 403(b) plan: Employees make deferrals to the designated Roth account after tax deductions. Under this plan, the employee receives tax-free distributions in retirement.

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

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:

  • Public schools
  • State colleges
  • Universities
  • 501(c)(3) tax-exempt organizations
  • Religious institutions
  • Cooperative hospital service organizations

Eligible Employees

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

  • Employees in the public school system involved in everyday activities
  • Public school system employees of tribal governments
  • Uniformed Services University of the Health Sciences (USUHS) civilian faculty and staff
  • Ministers employed by 501(c)(3) tax-exempt organizations and other businesses
  • Self-employed ministers

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:

  • Elective salary deferrals: The most an employee can contribute is $22,500.
  • Total annual contributions: Employers may match employee contributions, but this is optional. The most an employee and employer can contribute to a plan is $66,000 total.
  • Catch-up contributions by service: Employees who’ve been with the company for at least 15 years can contribute additional amounts ranging from $3,000 to $15,000.
  • Catch-up contributions by age: Employees who are at least 50 years old can put an additional $7,500 into their retirement account.

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)

Employee benefits 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 Employee benefits annually. Other reporting and disclosure requirements may apply depending on the benefit plan.