A 403(b) is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations and certain ministers. It also is known as a tax-sheltered annuity (TSA).

Individual accounts in a 403(b) plan can be any of the following types:

  • An annuity contract, which is provided through an insurance company,
  • A custodial account, which is invested in mutual funds or;
  • A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.

The features of the 403(b) plan are very similar to the 401(k) plan. Employees may make salary deferral contributions that are limited. The 403(b) and the 401(k) are not identical. There are some key differences.

  1. Eligible employers - Public school systems and nonprofit institutions, including churches, hospitals, private schools and colleges, and charitable institutions tax-exempt under Section 501(c)(3) of the Internal Revenue Code.
    Look Out!
    Be familiar with the types of employers that may offer a 403(b) plan. In
    Particular, be aware that public schools - but not other government employers - may offer a 403(b) plan.
  2. Funding - A 403(b) plan may be funded entirely by employee contributions. An employer is not required to contribute.
  3. Catch-up provision - 403(b) plans carry an additional catch-up contributions provision beyond what is available also to other employer-sponsored retirement plans such as 401(k) plans.

This additional catch-up provision applies to employees who:

  • Have completed 15 years of service for the employer and
  • The employer is an:
    • Educational organization;
    • Hospital;
    • Home health care agency;
    • Healthy and welfare agency;
    • Or church, synagogue or related organization.

In these cases, the employee contribution limit is increased by the least of:

  • $3,000.
  • $15,000 reduced by the sum of:
    • The increases of the general limit allowed in prior years because of this provision, plus;
    • The aggregate amount of designated Roth contributions for prior tax years, or;
  • $5,000 times the employee's years of service for the organization minus all prior elective deferrals made by the employer on the employee's behalf in the prior years.

An employee who qualifies for the 15-year rule, may contribute up to $20,500 (2013) under this limit. In addition, another $5,000 may be contributed by participants 50 or older under the standard catch-up provisions available in retirement plans.



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