(b)lines Ask the Experts – What Is a 403(b) Plan?

“I know this is a basic question, but what exactly IS a 403(b) plan? I just started working for an entity that sponsors one, and I have no idea what it is. And I figured, if I don’t know, perhaps other PLANSPONSOR readers do not know as well, so a response from the Experts would be helpful to them!”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

A 403(b) plan is a tax-deferred retirement plan that is similar to a 401(k) plan. However, a 403(b) plan may only be sponsored by certain employers and has some different rules. Generally, only public schools (including public colleges and universities), Code section 501(c)(3) tax-exempt organizations, and churches can set up 403(b) plans, with certain employees of those entities eligible to participate in the plan.

As with 401(k) plans, both employees and employers can contribute to a 403(b) plan. The same Code limits on deferrals and total contributions generally apply, although there is a special catch up contribution rule for 403(b) plans that may allow additional contributions to the plan for certain employees. Another difference relates to permitted investments, as 403(b) plans are limited to annuity contracts and custodial accounts (except in the case of certain retirement income accounts for 403(b) plans sponsored by a church).

One of the main differences from 401(k) plans is that, instead of the “actual deferral percentage” or ADP nondiscrimination test on salary reduction plans that applies to 401(k) plans, most 403(b) plans are subject to a “universal availability” rule that the plan only need be made available for salary reduction contributions by most employees (with a handful of exceptions).

In addition, because many 403(b) plan sponsors are church or governmental, many 403(b) plans are not subject to the Employee Retirement Income Security Act (ERISA). There is also a somewhat rare safe harbor exemption from ERISA for certain 403(b) plans that are salary reduction only and have very limited employer involvement.

As with any plan, the provisions of your plan document will determine the specific characteristics of your plan and should be carefully reviewed.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.