403(b) Plans

Section 403(b) retirement plans were established specifically for organizations that are tax exempt under IRC 501(c)(3), and for public educational organizations. Institutions eligible for a 403(b) plan include private colleges and universities, independent schools, research organizations, teaching hospitals, churches, and charitable organizations. Public teaching institutions, such as state universities and community colleges and K-12 public school systems, can also adopt 403(b) plans.

How 403(b) plans work

Retirement plans set up under Section 403(b) operate as defined contribution plans, in which the employer contributes a percentage of participating employees' compensation each year. Section 403(b) was enacted in 1958 to address a number of issues surrounding contribution limits. Even with contribution limits, the plans encourage the concept of individually owned, fully portable contracts.

Matching plans, in which employers contribute only to match employee contributions, are also allowed under Section 403(b). Employee contributions may be either before tax or after tax. Voluntary tax-deferred annuity (TDA) plans are always 403(b) plans, where all contributions are pretax employee contributions, also called salary reductions.

To operate a 403(b) plan, institutions can only use certain funding vehicles, such as individual or group annuity contracts purchased from insurance companies or mutual funds. These must not be transferable. In addition, there are contribution limits. Participants may not contribute to 403(b) plans more than is allowed under Section 415 of the Internal Revenue Code (IRC). Furthermore, 402(g) limits apply.