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403(b) Plan: Eligibility Requirements
Who May Establish a 403(b) Plan?
A 403(b) plan can be established by any of the following organizations:
- a tax-exempt organization established under section 501(c)(3) of the Internal Revenue Code - these organizations (see note below) are usually referred to as section 501(c)(3) organizations.
- public school systems.
- cooperative hospital service organizations.
- Uniformed Services University of the Health Sciences (USUHS).
- public school systems organized by Native American tribal governments.
- certain ministers.
An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes: charity, religion, education, science, literacy, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. To qualify, the organization must be a corporation, community chest, fund or foundation. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify.
Who May Participate in a 403(b) Plan?
Employees of the above list of employers may participate in the 403(b) plan maintained by the organization.
How is a 403(b) Plan Established?
The requirements for establishing a 403(b) plan depend on whether the employer will be making contributions or if only elective-deferral contributions will be made to the 403(b) plan.
Plans Receiving Employer Contributions (Title 1 Plans)
A 403(b) plan to which employer contributions are made is referred to as a "Title 1 403(b) plan". To establish a Title 1 403(b) plan, the organization, in accordance with the resolution passed by the organization's governing body, executes a 403(b) plan document. In addition, employees are provided a summary plan description agreement (SPD), which must be written in non-legal language so that the average person can understand it. The SPD must include explanations of the following:
- a description of what the plan provides for employees and how it operates.
- when employees may begin to participate in the plan.
- how employees' service and benefits are calculated.
- when employees' benefits become vested.
- when employees will receive payment and in what form.
- how employees may request benefits.
- the employees rights under ERISA.
Plans Receiving Only Elective-Deferral Contributions (Non-Title 1 Plans)
A 403(b) plan to which only elective-deferral contributions are made is referred to as a "Non-Title 1 403(b) plan". In addition to issuing an SPD that includes the items listed above, the organization should do the following when establishing a Non-Title 1 403(b) plan:
- notify employees of the financial institutions with which they may establish and maintain their individual 403(b) accounts.
- provide explanations to employees of how they may make salary-deferral contributions to the plan and the requirements for making such contributions, including documentation requirements.
- make arrangements with the payroll department to deduct deferral contributions from the paycheck of employees (who elect to make deferral contributions) and remit these amounts to the respective financial institutions.
Eligible Compensation
Employees' compensation is based on W-2 wages. An employee's compensation in excess of $200,000 may not be considered for purposes of making a 403(b) contribution.
Next: 403(b) Plan: Contributions
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