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February 17, 2009

403(b) Plan

Your Guide

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Definition

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

Individuals may defer up to 100% of their compensation up to the dollar limit that is in effect for the year. Individuals who reach age 50 by the end of the year may defer additional amounts referred to as ‘Catch-up’ contributions.

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.

Referring Cite

IRC § 403(b),IRS Publication 571

Additional Helpful Information

  • 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

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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