A 403(b) account may receive the following types of contributions:
- Elective-deferral contributions, which are deducted from employee paychecks on a pretax basis
- Employer contributions, which can be fixed or discretionary
- After-tax contributions, which are deducted from employee paychecks on an after-tax basis
- Roth 403(b) contributions
- A combination of any of the above contribution types listed above
If an employee makes contributions to his or her traditional 403(b) and Roth 403(b) account in the same year, the aggregate contribution must not exceed the salary deferral limits.
Eligible Compensation for Contributions
Employees' compensation is based on W-2 wages. An employee's compensation in excess of $255,000 may not be considered for purposes of making a 403(b) contribution.
Designated Roth Plans
Employers may elect to include a designated Roth account (Roth 403(b) account) as a feature of the 403(b) plan. This allows employees to make Roth 403(b) contributions which can grow tax-free. (For more insight, read Roth 401(k), 403(b): Which Is Right For You?)
Employer Contribution Limit
An employee may receive contributions of up to $51,000, or 100% of his or her compensation, whichever is less. This includes salary deferral contributions and employer contributions. For the purpose of determining an employee's contribution limit, any employee's compensation in excess of $255,000, which is the compensation cap, is not considered.
Salary Deferral Contribution Limits
An employee may elect to defer 100% of compensation up to a set dollar limit for that year (see chart below):
|Tax Year||Elective-Deferral Contribution Limit|
Deferral contributions in excess of these limits are excess deferrals, which must be removed from the employee's 403(b) plan account within a certain time frame. Excess contributions require special administrative handling and will be assessed penalties if not removed within these time frames.
Eligible employees who are at least age 50 by the end of the year may make additional contributions, which are called catch-up contributions. The catch-up contribution limits for different tax years are as follows:
|Tax Year||Catch-Up Contribution Limit|
For employees who have accrued at least 15 years of service with an educational organization, hospital, home health service agency, health and welfare service agency, or church; the limit on salary deferral contributions is increased by the lesser of:
2.$15,000, reduced by the sum of:
- The additional pretax elective deferrals made in prior years because of this rule, plus
- The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or
3.$5,000 times the number of years of service for the organization, minus the total elective deferrals made by the employer on the employee's behalf for earlier years.
Employees should check with their employers to determine if they meet this 15-year requirement.
Employers may include an automatic enrollment feature in their 403(b) plans, which allows them to set up automatic contributions for their employees. If the plan has a Roth 403(b) feature, the employer must indicate whether the automatic enrollment feature applies to the traditional 403(b) salary deferrals, Roth salary deferrals, or both.
The investment options for a 403(b) account are determined by the 403(b) product:
- A 403(b) annuity contract must invest in an annuity product provided through an insurance company. The product may be a variable or fixed annuity contract.
- A custodial account, which is provided through a retirement account custodian, must invest in regulated investment companies, such as mutual funds.
- A retirement income account may invest in vehicles such as annuities and publicly traded securities. Only churches and church-related organizations may establish retirement income accounts.
Generally, employees are allowed to select investments within the parameters stated above.
403(b) Plan: Distributions
RetirementFind out how the 403(b) plan helps employees of nonprofit entities meet their retirement goals.
RetirementA retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers.
Financial AdvisorThis plan doesn't get as much attention as its more popular cousin - the 401(k) - but it has a lot of benefits for eligible investors.
RetirementFind out what the contribution limits are for 401(k) retirement savings plans in 2016, including individual, employer and aggregate limits.
RetirementLearn how to decide between a traditional or Roth version of the 401(k), 403(b) or 457(b) retirement plans to help you build your nest egg.
Financial AdvisorThese plans resemble 401(k) plans in many respects, but are specially designed for nonprofit entities.
RetirementHere's what the limits look like for 2016, compared to 2015 (the taxes you'll file in April).
Financial AdvisorThere's plenty of advice about 401(k) plans, but what about 457 and 403(b) plans?