•	Employees of private organizations that are tax-exempt under IRC 501(c)(3).
•	Educational organizations of a state, political subdivision of a state, or an agency or instrumentality of a state.

In general, eligible employers include nonprofit and nonpolitical religious, charitable, scientific, educational, and other public interest-oriented organizations such as private schools, colleges, universities, research institutions, and teaching hospitals. If your client works for such an organization, his/her basic retirement plan is most likely either a 403(b) plan or a qualified plan. Strictly speaking, the term "qualified" is reserved for plans regulated by IRC sections 401(a) or 403(a). In industry parlance, however, the term is sometimes used less precisely to refer to tax-advantaged plans in general.

The main tax advantage of 401(k) plans, 403(b) non-qualified plans, and 401(a) or 403(a) qualified plans is the same: Amounts contributed (other than employee after-tax contributions) and the "inside" (pre-retirement) buildup of earnings aren't subject to federal income taxes until withdrawn.

403(b)s are sometimes referred to as "401(k)s for nonprofits," but there are both similarities and differences.

Similarities with 401(k)s
403(b) plans offer the same type of tax advantages associated with 401(k) and 401(a) qualified defined-contribution plans. Amounts contributed and the income earned aren't subject to federal income tax until received.

Plan participants can change the rate of contributions to both 401(k) plans and 403(b) plans at any time. (Employers sometimes restrict how often employees can change the salary reduction agreement.) And contributions to both 401(k) and 403(b) plans can consist of employee elective deferrals, employer contributions, and after-tax employee contributions. Like many 401(k) plans, 403(b) plans can and often do provide for employer matching contributions. Especially if the plan is the employer's only retirement plan, the match can be quite generous when compared to most private-sector 401(k) plans.

403(b) plans are often designed to work like money-purchase pension plans, in which the employer contributes a percentage of the participating employee's compensation each year. Like money purchase plans, they may have age-weighted contribution formulas or formulas that are in some way integrated with Social Security.

Participants in a 403(b) plan can contribute up to $11,000 a year in before-tax income, the same amount as 401(k) participants.

The rules for early withdrawal are similar to for both plans.

Differences with 401(k)s
In a 401(k) the employer must set up and administer the plan. 403(b) programs do not require employer involvement beyond making the payroll deduction if it is a voluntary salary reduction (TDA) plan.

Because 401(k)s require significant administration, many employers insist that terminating employees take their 401(k) funds with them. With 403(b)s there is no ongoing responsibility for the employer, so monies can stay in the plan even after termination of employment.

Vesting is automatic in most 403(b)s, while vesting periods of up to 3 years are common in 401(k) plans. But this is relevant only if the 403(b) plan sponsor is making matching contributions. Employee contributions are always 100 percent vested.

Overall contribution limits are calculated differently.

403(b) funds accumulated prior to 1987 aren't subject to mandatory federal minimum distribution rules; an individual can defer taking a distribution on this amount until age 75.

401(a) and 403(a) plans for non-profits can't accept voluntary pre-tax contributions from employees. But tax-exempt organizations (excluding state and local governments) can set up 401(k) plans that accept employee elective deferrals.

403(b)s, IRAs, and Keoghs
403(b)s, IRAs, and Keoghs all offer the advantages of tax-deferred earnings, but contributions to 403(b) plans are generally made by salary reduction with pre-tax dollars, which lowers taxable income as well. Contributions to IRAs and Keoghs are always made with after-tax dollars, which may or may not be tax deductible at the end of the year depending on your clients' income and whether they also participate actively in another retirement plan. There are different contribution limits for each of the plans, again based on your client's income and other factors.

IRAs and Keoghs also offer some different tax benefits -- notably, for a Roth IRA, the ability to withdraw accumulated funds entirely free of tax after age 59½, if the account has been held for at least five years.

403(b)(7) Plans
Created as part of a comprehensive revision of the laws covering ERISA retirement plans, 403(b)(7)s expand the original 403(b) concept by allowing employees to make contributions to custodial accounts invested in mutual funds, as well as annuity contracts. As a result, clients may exclude contributions from their gross income for federal (and most state) tax purposes whether they are invested in an annuity contract or a mutual fund custodial account.

• How Do 403(b) Plans Compare to 401(k)s, IRAs, and Keoghs? • Contributions • IRS Rules and Taxation • Income and Distribution Options • Minimum Distributions		• Overview of Plan Provisions • Vesting • Contracts and Certificates • Rollovers • Minimum Distribution Calculator