Eleanor Finch
A 403(b) plan is a retirement savings account offered to employees of schools, the public sector, and non-profits. It is also known as a Tax-Sheltered Annuity (TSA) plan. Employees who are eligible for a 403(b) plan include teachers, school administrators, professors, government employees, nurses, doctors, and librarians. Employers may contribute to their employees' 403(b) plans, but it is not mandatory. This contribution is called a nonelective employer contribution. The employee will pay income tax on these contributions only when they are withdrawn. The maximum combined amount that both the employer and the employee can contribute annually to the plan is $66,000 as of 2023.
| Characteristics | Values |
|---|---|
| Type of plan | Retirement savings account |
| Who can offer the plan | Public schools, government agencies, churches, and certain tax-exempt non-profit organizations |
| Who can contribute to the plan | All employees |
| Maximum contribution by an employee in 2023 | $22,500 |
| Maximum combined contribution by employer and employee in 2023 | $66,000 |
| Maximum combined contribution by employer and employee in 2024 | $69,000 |
| Maximum contribution by employees aged 50 or older in 2023 and 2024 | $7,500 |
| Maximum contribution by employees with 15 or more years of service | $3,000 |
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What You'll Learn
- Employers may match employee contributions, but this is optional
- Employers can make nonelective contributions to a former employee's account for up to 5 years after they leave
- Employers can offer both 403(b) and 401(k) plans, but the combined contributions cannot exceed the annual IRS limit
- Employers can contribute to a 403(b) plan, but they are not required to
- Employers may need to file Form 5500 annually and meet other reporting requirements
Employers may match employee contributions, but this is optional
A 403(b) plan is a retirement savings account offered to employees of schools, the public sector, and non-profits. It is also referred to as a tax-sheltered annuity (TSA) plan. It is a retirement savings plan for employees of public schools, government agencies, and certain other tax-exempt non-profit organizations. Teachers, school administrators, professors, government employees, nurses, doctors, and librarians are among the employees who are eligible for a 403(b) plan.
The 403(b) Tax-Sheltered Annuity Plan operates like a 401(k) plan, allowing participants to save money for retirement through payroll deductions while enjoying certain tax benefits. The two types of 403(b) plans are traditional and Roth. In a traditional 403(b) plan, employees defer a portion of their paychecks to the account before federal or state income tax deductions. This means that the money they receive when they retire will be taxed. In a Roth 403(b) plan, employees make deferrals to the designated Roth account after tax deductions, and they receive tax-free distributions in retirement.
The 403(b) plan has a limit on annual additions, which is generally the lesser of $69,000 in 2024 ($66,000 for 2023, $61,000 for 2022, and $58,000 for 2021) or 100% of includible compensation for the employee's most recent year of service. Employers may match employee contributions, but this is optional. The maximum an employee and employer can contribute to a plan is $66,000 total. Employees who have worked for the company for at least 15 years can contribute additional amounts ranging from $3,000 to $15,000.
Some employers may choose not to offer contributions toward 403(b) plans to avoid dealing with ERISA rules and regulations. Additionally, if a 403(b) plan is subject to ERISA, there may be a shorter time frame for forwarding elective deferrals to the vendor.
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Employers can make nonelective contributions to a former employee's account for up to 5 years after they leave
A 403(b) plan, also known as a Tax-Sheltered Annuity (TSA) plan, is a retirement savings account offered to employees of schools, the public sector, and non-profits. Employees eligible to use a 403(b) include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.
Nonelective contributions benefit employees by helping them save more for retirement. They are also advantageous for employers as they are tax-deductible and can encourage more employees to participate in the company's retirement plan. To be granted safe harbor by the IRS, employers' nonelective contributions must be at least 3%.
It is important to note that employees do not have the right to receive nonelective contributions as compensation instead of being contributed to the 403(b) plan. Employers should develop human resources and payroll protocols to ensure that employees eligible for nonelective contributions are not provided with the option to receive the contribution as cash compensation.
In addition to nonelective contributions, employers may also offer 403(b) plans that allow employees to make elective deferrals, which are contributions made under a salary reduction agreement. These agreements allow employers to withhold money from an employee's salary and deposit it into their 403(b) account.
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Employers can offer both 403(b) and 401(k) plans, but the combined contributions cannot exceed the annual IRS limit
A 403(b) plan is a retirement savings account offered to employees of schools, the public sector, and non-profits. Employees who are eligible for a 403(b) plan include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.
A 401(k) plan, on the other hand, is a retirement plan offered by private companies to their employees. These plans have more investment options than 403(b) plans, which only offer annuities and mutual funds.
If an employer offers both a 403(b) and a 401(k) plan, individuals can contribute to both. However, the combined contribution cannot exceed the annual IRS limit. For 2023, the contribution limit for both plans combined was $22,500, and in 2024, it increased to $23,000. For individuals aged 50 or older, there is an additional catch-up contribution of $7,500 for both 2023 and 2024.
The contribution limits are the same regardless of whether an individual contributes to one or both accounts. It is important to note that these limits are subject to change annually and may increase over time.
Employer matching is a significant aspect of both plans. While both 401(k) and 403(b) plans can offer employer matching, not all employers provide this benefit. Some employers may prefer to maintain their ERISA exemption in the case of 403(b) plans.
In summary, while it is possible to contribute to both a 403(b) and a 401(k) plan, it is crucial to stay within the annual contribution limits to avoid exceeding the IRS maximum.
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Employers can contribute to a 403(b) plan, but they are not required to
A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement savings plan for employees of public schools, government agencies, and certain other tax-exempt non-profit organizations. Employees who are eligible for a 403(b) plan include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.
The 403(b) plan operates similarly to a 401(k) plan, allowing participants to save money for retirement through payroll deductions. Both plans are employer-sponsored tax-advantaged retirement savings plans. However, a key difference is that while any business can offer a 401(k) plan, only certain types of organizations can offer a 403(b) plan. These organizations include public schools, churches, and certain 501(c)(3) charities.
Now, coming to the involvement of employers in a 403(b) plan, it is important to note that employers can contribute to a 403(b) plan, but they are not required to. This means that employer contributions are optional. Employers may choose to match employee contributions, but it is not mandatory. If an employer decides to contribute, the combined contribution of the employer and employee cannot exceed the annual limit set by the IRS. For example, in 2023, the maximum combined contribution was $66,000.
It is worth mentioning that if an employer chooses to offer contributions towards a 403(b) plan, the plan may become subject to ERISA (Employee Retirement Income Security Act) rules. This is because ERISA has a limited employer involvement rule, and employer contributions or involvement in the approval of distributions may trigger the applicability of ERISA regulations. Therefore, some employers may opt not to contribute to 403(b) plans to avoid dealing with ERISA rules and regulations.
In conclusion, while employers have the option to contribute to a 403(b) plan, it is not a mandatory requirement. Their involvement is typically limited to matching employee contributions voluntarily, and even then, there are annual limits on the total contributions that can be made to the plan.
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Employers may need to file Form 5500 annually and meet other reporting requirements
Employers who offer 403(b) plans typically need to file Form 5500 annually and meet other reporting requirements. This is because 403(b) plans are employer-sponsored retirement plans, and so differences in eligibility requirements and plan structure mean that not all employer-sponsored retirement plans are the same.
For example, 403(b) plans established by not-for-profits are generally covered by ERISA. However, if they meet the strict requirements under the employer non-involvement rule, they may be exempt from ERISA. An example of this is if an employer offers employer contributions to a 403(b) plan or is involved in the approval of distributions, the plan would become subject to ERISA rules.
Therefore, some employers may choose not to offer contributions towards 403(b) plans because they wish to avoid dealing with ERISA rules and regulations. It is important to note that these plans are still subject to all of the IRS regulations.
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Frequently asked questions
A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement savings account offered to employees of schools, the public sector, and non-profits.
Employer involvement in a 403(b) plan can include offering the plan to employees, matching employee contributions, and making nonelective contributions. Employers may also need to file Form 5500 annually and comply with IRS rules and other stipulations outlined in the agreement between the employee and employer.
The benefits of a 403(b) plan for employees include tax advantages, the ability to save for retirement through payroll deductions, and the potential for immediate vesting of funds.
