A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees' accounts. Choose a 403(b) Plan Participate in a 403(b) plan Establish a 403(b) plan Operate and maintain a 403(b) plan Correct 403(b) plan errors Terminate a 403(b) plan Choose a 403(b) plan A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities. It's similar to a 401(k) plan maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until it's distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently but is tax-free (including earnings) when distributed. Eligible employers are a: public school, college, or university, church, or charitable entity tax-exempt under Section 501(c)(3) of the Internal Revenue Code Pros and cons: Flexibility in contributions Investment options are limited to those chosen by the employer may have high administrative costs optional loans and hardship distributions add flexibility for employees Contribution Type - Employee salary deferrals; employer may contribute. Contribution limits - Total contributions to each employee’s 403(b) account or annuity are limited. Filing requirements - Certain 403(b) plans may be subject to annual Form 5500 filing requirements. Participant loans - Permitted if the terms of the plan allow loans. In-service withdrawals - Yes, but subject to possible 10% penalty if under age 59-1/2. Return to Top Participate in a 403(b) plan The following employees are eligible to participate in a 403(b) plan: Employees of tax-exempt organizations established under IRC Section 501(c)(3). Employees of public school systems who are involved in the day-to-day operations of a school. Employees of cooperative hospital service organizations. Civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS). Employees of public school systems organized by Indian tribal governments. Certain ministers if they are: Ministers employed by Section 501(c)(3) organizations. Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer. Ministers (chaplains) who meet both of the following requirements. They are employed by organizations that are not Section 501(c)(3) organizations. They function as ministers in their day-to-day professional responsibilities with their employers. Universal availability rule The "universal availability rule" 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 of the organization. The employer may exclude certain employees from the plan: Employees who will contribute $200 or less annually Those employees who participate in a 401(k) or 457(b) plan or in another 403(b) plan of the employer Nonresident aliens Employees who normally work less than 20 hours per week Students performing services described in IRC Section 3121(b)(10) Return to Top Establish a 403(b) plan Only public educational institutions or 501(c)(3) tax-exempt organizations may establish a 403(b) plan. The general steps to establish a 403(b) plan are: 1. Adopt a written program All 403(b) plans, except church plans that do not contain any retirement income accounts, must have a written program that must contain mandatory provisions and may contain other optional provisions. Sample Plan Provisions PDF - To assist in drafting Section 403(b) pre-approved plans Model Plan Language for Public Schools - For use in drafting or amending a written program that reflects the 403(b) regulation’s requirements. May also be tailored for use by other types of eligible employers. 403(b) Pre-Approved Plans - The IRS began accepting applications from pre-approved plan sponsors in July 2013. 2. Establish annuity contracts or custodial accounts for plan participants Individual accounts in a 403(b) plan can be any of the following: An annuity contract, which is a contract provided through an insurance company; A custodial account, which is an account invested in mutual funds; or A retirement income account set up for church employees that can be invested in either annuities or mutual funds. 403(b) plans cannot be funded with life insurance (issued after September 24, 2007), endowment, health, accident or other types of insurance contracts. The employer, who is responsible for ensuring its plan complies with all legal requirements, should verify that there is no conflict between the terms of the 403(b) plan and the provisions of any annuity contract or custodial account agreement under the plan. The plan’s terms will overrule any inconsistencies. 3. Obtain an identification number for the plan 403(b) plans that are subject to ERISA must comply with DOL regulations, which may include obtaining an employee identification number (EIN) for the plan. Governmental, non-electing church and other 403(b) plans that meet the safe-harbor requirements under the DOL regulations are not subject to ERISA. 4. Provide information to employees and meet other obligations 403(b) plans that are not exempt from ERISA must also supply information to plan participants, including a Summary Plan Description PDF, and must meet other fiduciary obligations PDF. Return to Top Operate and maintain a 403(b) plan An eligible employer that has established a 403(b) plan must operate and maintain the plan by taking certain actions to ensure it continues to provide tax-deferred benefits to plan participants. Follow the terms of the plan An employer must operate its 403(b) plan according to its written program or the plan may be disqualified. This may lead to the loss of tax-deferred status for all plan contracts. Deposit employee contributions in a timely manner You must deposit all contributions to a 403(b) plan account or transfer them to an annuity contract issuer within a period that is not longer than is reasonable for the proper administration of the plan. 403(b) plans governed by ERISA may be subject to more restrictive requirements. Reporting and participant disclosure Certain 403(b) plans may be subject to annual Form 5500 filing requirements, and all plans are required to provide information to participants. See Retirement Plan Reporting and Disclosure for a chart of the requirements. Conduct periodic reviews The IRS provides checklists and tips to help you conduct periodic reviews of your 403(b) plan. See Have you had your retirement plan check-up this year? Update the plan document for recent law changes See Amend or Update a Plan. You must amend your plan document periodically to comply with current law. The IRS provides resources to help you keep your plan up-to-date, including sample plan language. Nondiscrimination testing The plan administrator may need to conduct annual testing to determine whether the plan complies with required nondiscrimination provisions for eligibility and benefits. This requirement depends on the type of organization sponsoring the plan and/or the type of 403(b) plan. Return to Top Correct 403(b) plan errors Find, fix and avoid plan errors. Correcting Plan Errors 403(b) Fix-It-Guide 403(b) Plan Checklist PDF Return to Top Terminate a 403(b) plan If allowed by the terms of the plan, a 403(b) plan sponsor (employer) may terminate the plan and distribute accumulated benefits to the participants and beneficiaries on termination. To terminate a 403(b) plan, the plan sponsor must take the following steps: Adopt a binding resolution: establishing a plan termination date, ceasing plan contributions, fully vesting all benefits on the termination date, and authorizing the distribution of all benefits as soon as administratively practicable after the termination date; Generally, stop contributions by the sponsor or any related entity to any other 403(b) plan during the period that begins on the termination date and ends 12 months after all benefits have been distributed from the terminated plan (this requirement may be disregarded if at all times during the period beginning 12 months before the termination and ending 12 months after all benefits have been distributed, fewer than 2% of the employees who were eligible to participate in the terminated plan are eligible to participate in another 403(b) plan of the sponsor); Notify all plan participants and beneficiaries about the plan’s termination; Provide a 402(f) rollover notice to participants and beneficiaries; and Distribute all plan assets within 12 months of the plan’s termination date to participants and beneficiaries in accordance with Rev. Rul. 2011-7. 403(b) plans subject to ERISA may have to comply with additional requirements. Return to Top Related Find more information on forms, publications and other 403(b) resources.
