403(b) plans are a type of defined contribution retirement plan, and are usually established by public schools, universities, churches, charities, and other tax-exempt organizations. For the most part, 403(b) plans are very similar to the more well-known 401(k) plans. Just like 401(k) plans, 403(b) plans are named after the section of the tax code that created them. Although the 401(k) plan is now much better-known, 403(b) plans were actually created first, in 1958.
To qualify for a 403(b) plan, a tax-exempt organization must be a corporation, fund, or foundation, rather than a single individual or a partnership. 403(b) plans typically have less paperwork and lower administrative costs than other retirement plans. While 401(k) plans often have vesting schedules that are spread out over several years, most 403(b) plans vest immediately, or over a shorter period of time than 401(k) plans. Originally, 403(b) plan participants were restricted to investing in annuities, and 403(b) plans were often called tax-sheltered annuities or TSAs. However, in 1974 this restriction was lifted and 403(b) plans can also invest in mutual funds.
Just like a 401(k) plan, 403(b) plans let employees of non-profit entities contribute part of their income to the plan on a tax-deferred basis. The deferred contribution are not subject to federal or state income tax until the plan participants take distributions. With 403(b) plans, the employer may also contribute to the plan along with the employee, but 403(b) plans can’t accept profit sharing, because they’re designed for non-profit organizations. If the employer does contribute, the plan must follow the rules set out by the Employee Retirement Income Security Act (ERISA). If the employer doesn’t contribute to the plan, the reporting rules are much less strict. For that reason, 401(k) plans offer employer matching at a much higher rate than 403(b) plans.
403(b) contributions are limited – for 2016 an employee can contribute up to $18,000, and employees who are 50 and older can make catch-up contributions of $6,000. Overall, the total contribution (employee and employer) for 2016 is limited to the lesser of $53,000 or 100 percent of the employee’s compensation for the most recent year. In addition to the catch-up provision for employees age 50 and older, some employees with at least 15 years of service can also make additional contributions of up to $3,000 each year. In some cases, both of these catch-up provisions apply and may allow the employee to make even more contributions.
Take advantage of your plan
If your company is a non-profit organization, you may be able to benefit from a 403(b) plan. Even if you are already providing another retirement plan, a 403(b) could offer your employees an additional vehicle for retirement savings. FiduciaryFirst is a professional investment fiduciary that can help your company establish and administer a 403(b) plan. For more information, contact us at 1-866-625-4611.
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This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, the plan sponsor will be in compliance with ERISA regulations.