Retirement Plans – What You Need to Know About 403(b) Plans

By June 24, 2019 January 15th, 2020 No Comments

A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools, certain tax-exempt organizations, and certain charities. It’s similar to a 401(k)-plan maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until it’s distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently, but is tax-free (including earnings) when distributed.

An individual’s 403(b) annuity can be obtained only under an employer’s TSA plan. Generally, these annuities are funded by elective deferrals made under salary reduction agreements and non-elective employer contributions. 

Eligible employers are a:

  • public school, college, or university,
  • church; or
  • charitable entity tax-exempt under Section 501(c)(3) of the Internal Revenue Code

Pros and Cons:

  • Flexibility in contributions
  • Investment options are limited to those chosen by the employer
  • may have high administrative costs
  • optional loans and hardship distributions add flexibility for employees

Which employers can establish a 403(b) plan?

Generally, public schools, Code Section 501(c)(3) tax-exempt organizations or churches can set up 403(b) plans.

Who can participate in a 403(b) plan?

  • Eligible employees of Code Section 501(c)(3) tax-exempt organizations;
  • Eligible employees of public-school systems. A public-school system is defined in Code Section 170(b)(1)(A)(ii) as an education organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly conducted. Included in this category are employees of:
  • Public schools
  • State colleges
  • Universities
  • Eligible employees of churches;
  • Employees of public-school systems organized by Indian tribal governments;
  • Ministers employed by Code Section 501(c)(3) organizations;
  • Self-employed ministers, treated as employed by a tax-exempt organization that is a qualified employer; and
  • Ministers (chaplains) who meet both the following requirements:
  1. They are employed by organizations that are not Code Section 501(c)(3) tax-exempt organizations, and
  2. They function as ministers in their day-to-day professional responsibilities with their employers.


What are the benefits of participating in a 403(b) plan?

There are significant tax advantages for participants in a 403(b), including pre-tax contributions to 403(b) plan and earnings on these amounts are not taxed until they are distributed from the plan.

When can an employee join a 403(b) plan?

The terms of the employer’s 403(b) plan govern when an employee may enroll. However, a 403(b) plan is generally required to allow all eligible employees to participate in the plan as of their employment commencement date (the universal availability rule). Employees should check with their employer to determine how to enroll in the plan.


What types of contributions can be made to a 403(b) plan?

A 403(b) plan may allow:

  • Elective deferrals – employee contributions made under a salary reduction agreement. The agreement allows an employer to withhold money from an employee’s salary and deposit it into a 403(b) account.
  • Nonelective employer contributions – contributions other than those made under a salary reduction agreement that include matching contributions, discretionary contributions and certain mandatory contributions made by the employer. The employee pays income tax on these contributions only when they are withdrawn.
  • After-tax contributions – contributions (otherwise referred to as voluntary contributions that are not designated Roth contributions) made by an employee, which are reported as compensation in the year contributed and included in the employee’s gross income for income tax purposes.
  • Designated Roth contributions – elective deferrals that the employee elects to include in gross income. The plan must keep separate accounting records for all contributions, gains, and losses in the designated Roth account.

May an employer sponsoring a 403(b) plan exclude any employee from contributing to an account in the plan?

A 403(b) plan must generally allow all employees to make elective deferrals to the plan. Under the universal availability rule, if an employer permits one employee to defer salary by contributing it to a 403(b) plan, the employer must extend this offer to all employees of the organization. However, the following exception describes limited situations in which employees may be excluded:

  • employees who will contribute $200 or less annually;
  • employees who participate in a 401(k) or 457(b) plan or in another 403(b) plan of the employer;
  • nonresident aliens;
  • employees who normally work less than 20 hours per week; and
  • students performing services described in Code Section 3121(b)(10).

Plan Investments

How are 403(b) plan assets invested?

Assets in a 403(b) plan can be placed in any of the following investment types: 

  • an annuity contract provided through an insurance company;
  • a custodial account invested in mutual funds; or
  • a retirement income account set up for church employees. 

Loans and Distributions 

Can employees take loans from their 403(b) account?

Yes, a 403(b) plan may, but is not required to, allow loans. If permitted by the plan, employees may obtain a loan to the extent and in the manner allowed by the plan. 

When can employees take money out of a 403(b) plan?

In addition to loans and hardship distributions, a 403(b) plan may allow employees to take money out of the plan when they:

  • reach age 59½;
  • have a severance from employment;
  • become disabled;
  • die; or
  • encounter a financial hardship. 

The employee will have to pay taxes on any amount of the distribution that was not from designated Roth or after-tax contributions and may have to pay an additional 10% early distribution tax unless an exception to this tax applies. 

To learn more about 403(b) plans, please visit the IRS website.

What CMR can do for you

CMR & Associates provides independent retirement and insurance advice by reviewing your current plans to improve coverage and reduce cost. Through our proprietary database – The CMR Database® (comprised of some 13000 brokers and specialists globally) – we maximize access to the retirement and insurance industry for greater options that will translate to better coverage and lower cost. Since 1999, we have saved clients over $120 million.

Please email CMR Associates or call 877-447-4301 or 212-447-4300 for more information.