A 403(b) plan functions in a manner similar to a 401(k) plan – similar characteristics, withdrawals*, contribution limits, tax rules and investment choices – with the exception that 403(b) plans are available only to employees of eligible tax-exempt organizations, including:
Previously, 403(b) plans were exempt from many of the document, recordkeeping and reporting requirements that other retirement plans were subject to. However, new regulations have significantly changed how 403(b) plans are administered, and employers must now take a more active role in overseeing their plans to ensure they comply with IRS regulations. Specifically, most 403(b) plans are now required to maintain plan documents and file an annual Form 5500 just like their 401(k) counterparts.
*Distributions before the age of 59 1/2 may be subject to an additional 10% early withdrawal penalty. Withdrawals may be subject to ordinary income tax. A default on a loan would be treated as a distribution.
Feature
403(b) Plan
401(k) Plan
Eligible Organization
Code 501(c)(3) tax-exempt organizations, public education institutions and churches/church-related organizations
Generally, corporations, sole proprietors, public and private companies, tax-exempt employers. No governmental employers.
Plan Document
Must have written plan document
Employee Salary Reduction (before-tax) Contributions
Yes. Generally limited to $17,000 (in 2012, higher limits in future years). Governed by Sections 415 and 402(g).
Section 415 Contribution Limits
Applies. In 2012, limit is the lesser of $50,000 or 100 percent of compensation, subject to future indexing in $1,000 increments.
Section 402(g) Limit
Applies. Limit is $17,000 in 2012 (higher limits in future years).
Section 401(a)(17) Compensation Limit
Applies. Limit is $200,000 in 2012, subject to future indexing in $5,000 increments.
Maximum Exclusion Allowance (MEA)
Repealed effective Jan. 1, 2002. Alternative limits A, B and C also repealed.
Not applicable.
Employee Salary Deduction (after-tax) Contributions
Yes. 415 limits apply.
Contribution Coordination
Employee pre-tax contributions to a 403(b) and a 401(k) plan in the same year are limited in the aggregate to the Section 402(g) limit.
Employee pre-tax contributions to a 401(k) plan and a 403(b) plan in the same year are limited in the aggregate to the Section 402(g) limit.
Age 50 Catch-up Amounts
If plan permits, for those age 50 and over, an additional $5,500 (in 2012, higher amounts applying in future years) elective salary deferral permitted. One catch-up allowed for 401(k) and 403(b).
Other Catch-up Amounts
For those with 15 years or more of service at qualifying institution (same employer), up to an additional $3,000 elective salary deferral per year ($15,000 max lifetime). Prior year contributions may limit this amount. Employee eligible for both age 50 and 15-year catch-up.
Not available.
Total Contribution Limit (employer + employee)
Lesser of 100 percent of taxable compensation or $50,000 in 2012. Governed by Section 415. Section 402(g) applies to elective deferral.
Lesser of 100 percent of taxable compensation or $50,000 in 2012. Governed by Section 415. Section 402(g) also applies to elective deferral.
Prototype Plan
No.
Yes.
Model Plan
Funding
Funded – not subject to the creditors of the employer.
Vesting: Employee Contributions
Immediate.
Vesting: Employer Contributions
For plan years beginning after Dec. 31, 2006, all employer contributions must be fully vested either after three years, or in 20 percent increments beginning with the employee's second year of service. Full vesting after the employee has completed six years of service.
Maximum Waiting Periods
For plans with immediate vesting: two years and age 21 or one year and age 26 (latter for educational institutions only). For delayed vesting plan: one year and age 21.
Loans
Permitted.
Triggering Events
Severance from service, age 59½, disability or death. Hardship may also be available.
Severance from service, age 59½, disability or death. Hardship may also be available for 401(k) elective deferral.
Early Withdrawal Penalty
Yes, 10 percent before age 59½, including any amounts rolled over from 457(b) public plans.
Rollovers Out
Permitted to IRA, 401(a), 401(k), 457(b) public and other 403(b) plans that accept it. Not permitted to 457(b) private plans.
Permitted to IRA, 403(b), 457(b) public and other 401(a) and 401(k) plans that accept it. Not permitted to 457(b) private plans.
Rollovers In
If new plan permits, from IRA, 401(a), 403(a), 401(k), 457(b) public and other 403(b) plans – subject to the rules of the new plan. Not permitted from 457(b) private plans.
If new plan permits, from IRA, 403(b), 457(b) public and other 401(a), 403(a) and 401(k) plans – subject to the rules of the new plan. Not permitted from 457(b) private plans.
5500 Filing
Yes, but simplified.
Yes, but more complicated.
Determination Letter
Not required, but strongly recommended.
Nondiscrimination Testing (for private institutions only)