Retirement Plans FAQs regarding 403(b) Tax-Sheltered Annuity Plans
These frequently asked questions and answers provide general information and should not be cited as any type of legal authority. They provide the user with information responsive to general inquiries. Because these answers do not apply to every situation, yours may require additional research.
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What is a 403(b) plan?
A 403(b) plan, also known as a tax-sheltered annuity plan, is a retirement plan for certain employees of public schools, employees of certain Code §501(c)(3) tax-exempt organizations and certain ministers. A 403(b) plan allows employees to contribute some of their salary to the plan. The employer may also contribute to the plan for employees.
Which employers can establish a 403(b) plan?
Generally, public schools, Code §501(c)(3) tax-exempt organizations or churches can set up 403(b) plans.
Who can participate in a 403(b) plan?
What are the benefits of participating in a 403(b) plan?
There are significant tax advantages for participants in a 403(b), including pre-tax contributions to a 403(b) plan and earnings on these amounts are not taxed until they are distributed from the plan.
When can an employee join a 403(b) plan?
The terms of the employer’s 403(b) plan govern when an employee may enroll. However, a 403(b) plan is generally required to allow all eligible employees to participate in the plan as of their employment commencement date (the universal availability rule). Employees should check with their employer to determine how to enroll in the plan.
Can a 403(b) plan automatically enroll employees in the plan?
Yes, a 403(b) plan can automatically enroll employees if the plan allows employees to contribute to the plan, the plan’s provisions contain an automatic contribution arrangement and the employee does not opt-out (affirmatively elect not to participate) of the plan’s automatic enrollment.
What types of contributions can be made to a 403(b) plan?
A 403(b) plan may allow:
May an employer sponsoring a 403(b) plan exclude any employee from contributing in the plan?
Generally, yes. A 403(b) plan must generally allow all employees to make elective deferrals to the plan. Under the universal availability rule, if an employer permits one employee to defer salary by contributing it to a 403(b) plan, the employer must extend this offer to all employees of the organization with the following exceptions:
What is the maximum amount of elective deferrals an employee can contribute to a 403(b) plan?
The maximum amount of elective deferrals an employee can contribute annually to a 403(b) is generally the lesser of:
However, this general limit is reduced by the amount of elective deferrals an employee makes to:
Does the employer have to contribute to a 403(b) plan for employees?
No. An employer may, but is not required to, contribute to the 403(b) plan for employees.
What is the maximum annual combined amount the employer and employee can contribute to a 403(b) plan for an employee?
The maximum combined amount both the employer and the employee can contribute annually to the plan is generally the lesser of:
Can an employer contribute to a 403(b) plan for a former employee?
Yes, if the plan allows, an employer can make nonelective contributions, up to the annual limits ($50,000 for 2012; $51,000 for 2013 and subject to annual cost-of-living increases), to a former employee’s account for 5 years after the date of severance. However, no portion of these contributions can come from money otherwise payable to the former employee by the employer and must cease at the death of the former employee.
When must the plan sponsor send elective deferrals to the vendor?
The 403(b) plan sponsor must send elective deferrals to the vendor within an administratively feasible period (generally, within 15 business days following the month in which these amounts would have been paid to an employee).
However, a 403(b) plan subject to the Employer Retirement Security Income Act of 1974 (ERISA) should review the Department of Labor’s rules for a potentially shorter time-frame for forwarding elective deferrals to the vendor.
How are 403(b) plan assets invested?
Assets in a 403(b) plan can be placed in any of the following investment types:
What are the rules on in-service transfers or exchanges?
Contract exchanges with a non-payroll slot vendor are permitted if:
Only eligible rollover distributions can be transferred between a 403(b) plan and a qualified plan (for example, a 401(k) plan) or a 457 plan).
403(b) plans subject to the Employer Retirement Income Security Act of 1974 (ERISA) should also consult the Department of Labor’s rules for additional conditions on in-service transfers.
Do the in-service transfer rules also apply to custodial accounts and church retirement income accounts?
Loans and Distributions
Can employees take loans from their 403(b) account?
Yes, a 403(b) plan may, but is not required to, allow loans. If permitted by the plan, employees may obtain a loan to the extent and in the manner allowed by the plan.
Can employees get a hardship distribution from their 403(b) account?
A 403(b) plan may, but is not required to, allow hardship distributions. If permitted by the plan, participants may obtain a hardship distribution to the extent and in the manner allowed by the plan.
When can employees take money out of a 403(b) plan?
In addition to loans and hardship distributions, a 403(b) plan may allow employees to take money out of the plan when they:
The employee will have to pay taxes on any amount of the distribution that was not from designated Roth or after-tax contributions and may have to pay an additional 10% early distribution tax unless an exception to this tax applies.
How are benefits paid to an employee from a 403(b) plan?
403(b) plans may provide employees with a choice on how benefits will be paid. For example, an employee can choose to have benefits paid in a lump sum.
Written Plan Requirement
What is the “written plan” requirement?
A 403(b) plan must be maintained under a written program which contains all the terms and conditions for eligibility, benefits, limitations, the form and timing of distributions and contracts available under the plan, and the party responsible for plan administration which satisfy Code §403(b).
The written plan requirement does not mean that the plan must be contained in a single document. For example, the plan can consist of multiple documents that contain the various plan provisions regarding salary reduction agreements, contracts that fund the plan, eligibility rules, how the plan will pay benefits and the nondiscrimination rules.
Church plans that do not contain any retirement income accounts are exempt from having a 403(b) written plan.
Are there any vendor contracts that are excluded from the 403(b) written plan requirement?
Yes. The following contracts are excluded:
What was the deadline for having a written 403(b) plan?
The deadline for 403(b) plan sponsors to adopt new written plans or amend their existing written plans that were effective in 2009 was December 31, 2009. The IRS considers 403(b) plans as having timely adopted a written plan if the plan sponsor:
Do 403(b) plans have to amend their plan documents to comply with changes in the law?
Yes. However, 403(b) plans do not have to amend their plan documents until after the commencement of the initial remedial amendment period described in Notice 2009-89.
Existing 403(b) plans will have a remedial amendment period retroactive to January 1, 2010, or the effective date of their plan, if later, to correct form defects in their plan documents retroactive to January 1, 2010 if the employer:
Reliance for employers who establish a 403(b) plan on or after January 1, 2010, is retroactive to the plan’s effective date if the employers either:
Does having a written plan cause a non-ERISA 403(b) plan to become subject to ERISA?
For guidance on what may cause a 403(b) plan to be subject to ERISA, please consult the Department of Labor’s rules.
Coverage and Nondiscrimination
What is “universal availability”?
Generally, universal availability means that if an employer permits one employee to defer salary into a 403(b) plan, the employer must extend this offer to all employees, other than those whom the law allows to be excluded.
Universal availability also requires the plan to give meaningful notice to employees of their right to make elective deferrals. The notice must notify the employees of:
Which employees can be excluded from the plan?
A 403(b) plan may exclude certain employees from universal availability for elective deferrals:
Are there nondiscrimination rules that apply to employer contributions?
Yes, nongovernmental and non-Church 403(b) plans must satisfy the nondiscrimination requirements for both employer nonelective and matching contributions.
An employer’s nonelective contributions must satisfy all of the following nondiscrimination requirements in the same manner as a qualified plan under Code §401(a):
Termination of Plan
Can an employer terminate a 403(b) plan?
Yes, subject to the termination guidelines in Treas. Reg. §1.403(b)-10.
What happens to a participant’s assets when a 403(b) plan is terminated?
Generally, a terminating 403(b) plan must distribute all accumulated benefits to the participants and beneficiaries as soon as administratively feasible. Revenue Ruling 2011-7 provides examples of how to terminate a 403(b) retirement plan funded in different ways and explains when the terminating plan’s distributions are taxable.