Also referred to as a tax sheltered annuity (TSA), is a retirement plan established by a nonprofit- tax-exempt organization as described under IRC § 501(c)(3) , public school systems including those organized by Indian tribal governments , cooperative hospital service organizations, Uniformed Services University of the Health Sciences (USUHS) for their employees, and certain ministers.
Under a 403(b) plan, eligible employees may defer a portion of their wages/salary to their account under the plan. These deferred amounts are referred to as Salary-Deferral Contributions, and can be made on a pre-tax and/or post-tax basis.
Contributions under a 403(b) plan can be invested in :
- An annuity contract as described under IRC § 403(b)(1),
- A custodial account as described under IRC § 403(b)(7) , where investments are limited to regulated investment companies described in IRC §851(a)(1)(A) :or
- A retirement income account as described under IRC § 403(b)(9), for which there is usually no restriction on investments
Earnings in a 403(b) account grow on a tax-deferred basis and distributions are treated as ordinary income
The dollar limits are available here
These are the limits established under federal law. However, an employer may elect to reduce the percentage of salary that an employee may defer to its 403(b) plan. For instance, the plan may be designed to limit Salary Deferrals to 10% of compensation. In such a case, if the individual’s compensation for the year is $70,000, the maximum amount he/she can contribute as salary deferral contributions for the year is $7,000 ($70,000 x 10%).
403(b)s are subject to other rules that may allow contributions in excess of these amounts. For example, the 15-year rule.
Employers may choose to make matching contributions to the accounts of employees who make salary deferral contributions.
Additional Helpful Information
- IRS List of Resources on 403(b) Plans
- Final 403(b) Regulations
- DOL Field Assistance Bulletin 2007-02: Addresses the issue of ” How do the Department of the Treasury/Internal Revenue Service regulations governing Internal Revenue Code § 403(b) tax-sheltered annuity programs affect the status of such programs under the Department of Labor’s safe harbor regulation at 29 C.F.R. § 2510.3-2(f)?
- IRS Newsletter on 403(b) Plan Regulations
- 403(b) Headlines from Benefitslink
- ICI Letter to Treasury Re: Final Regulations Under Code Section 403(b) (Investment Company Institute)
- Overview: 403(b) Funds – Tax-Free Transfers Under the Final Regulations (PDF) (National Tax Sheltered Accounts Association)
- Rev. Proc. 2007-71: Model 403(b) Plan Documents and Plan Amendments for Public School Sponsors (PDF)This revenue procedure provides model plan language that may be used by public schools either to adopt a written plan to reflect the requirements of § 403(b) and the regulations thereunder or to amend its § 403(b) plan to reflect the requirements of § 403(b) and the regulations thereunder. This revenue procedure also provides rules for when plan amendments or a written plan are required to be adopted by public schools or other eligible employers to comply with the recently published final regulations under § 403(b) (72 FR 41128; TD 9340). This revenue procedure also provides guidance relating to the application of § 403(b) to certain contracts issued before 2009
- Notice 2009-3: Extends the deadline by which a 403(b) plan sponsor needs to have a written §403(b) plan in place. The deadline has been extended from January 1, 2009 to December 31, 2009, providing the plan sponsor satisfied certain requirements
- FIELD ASSISTANCE BULLETIN –FAB 2009-02: ANNUAL REPORTING REQUIREMENTS FOR 403(b) PLANS : This Bulletin provides guidance on certain Form 5500 Annual Return/Report requirements for tax-sheltered annuity programs described in section 403(b) of the Internal Revenue Code (Code) with respect to contracts issued before January 1, 2009. The guidance in this Bulletin relates solely to Form 5500 reporting obligations and does not address any other issue under Title I of ERISA or any obligations under the Code
- Revenue Ruling 2009-18: Makes some previous 403(b) guidance obsolete