In the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

, a 403(b) plan is a U.S. tax-advantaged

retirement Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload. Many people choose to retire when they are elderly or incapable of doing their j ...

savings plan available for

public education State schools (in England, Wales, Australia and New Zealand) or public schools (Scottish English and North American English) are generally primary or secondary educational institution, schools that educate all students without charge. They are ...

organization An organization or organisation (Commonwealth English; see spelling differences), is an entity—such as a company, an institution, or an association—comprising one or more people and having a particular purpose. The word is derived f ...

s, some

non-profit A nonprofit organization (NPO) or non-profit organisation, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in co ...

employers (only

Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 2 ...

501(c)(3) A 501(c)(3) organization is a United States corporation, trust, unincorporated association or other type of organization exempt from federal income tax under section 501(c)(3) of Title 26 of the United States Code. It is one of the 29 types of ...

organizations), cooperative hospital service organizations, and self-employed ministers in the

. It has tax treatment similar to a

401(k) In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of the ...

plan, especially after the Economic Growth and Tax Relief Reconciliation Act of 2001. Employee salary deferrals into a 403(b) plan are made before

income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Ta ...

is paid and allowed to grow tax-deferred until the money is taxed as income when withdrawn from the plan. 403(b) plans are also referred to as a tax-sheltered annuity (TSA) although since 1974 they no longer are restricted to an annuity form and participants can also invest in

mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICA ...

Regulation

The Employee Retirement Income Security Act (ERISA) does not require 403(b) plans to be technically "qualified" plans (i.e., plans governed by U.S. Tax Code 401(a)), but 403(b) plans have the same general appearance as qualified plans. While the option is available it is not known how prevalent or if any 403(b) plan has been started or amended to be ERISA-qualified. This is because the main advantage of ERISA plans for participants has been in the event of

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debto ...

of the account holder, but this advantage ceased to exist after the October 2007

Bankruptcy Abuse Prevention and Consumer Protection Act The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) () is a legislative act that made several significant changes to the United States Bankruptcy Code. Referred to colloquially as the "New Bankruptcy Law", the Act of Co ...

extended bankruptcy protection to 403(b) plans. While they are different in some fundamental ways, qualified and unqualified plans appear almost the same to the participant and the options available are very similar. The only important differences for the participants are some additional ways that they can withdraw employer money, not salary-deferral money, before the typical 59½ age restriction, but only if the plan is funded with

annuities In investment, an annuity is a series of payments made at equal intervals.Kellison, Stephen G. (1970). ''The Theory of Interest''. Homewood, Illinois: Richard D. Irwin, Inc. p. 45 Examples of annuities are regular deposits to a savings account, m ...

and not

s. The federal government wants to eliminate this difference in proposed regulations expected to be finalized in 2007. From a plan administration standpoint, 403(b) plans do not have many of the same technical difficulties that 401(k) plans do, such as discrimination testing, especially if the plan is not an ERISA plan. If the plan ''is'' an ERISA plan (the employer makes contributions to employee accounts) there are additional restrictions and administrative issues applicable to those employer contributions, but not if a plan of a government employer which is not subject to discrimination testing. Salary-deferral contributions are not subject to complicated discrimination testing. 403(b) plans are instead subject to universal availability which, briefly and in general, means all employees must be permitted to make salary-deferral contributions. 403(b) plans also have simpler and less costly annual reporting requirements on

Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory t ...

(IRS) Form 5500, including not having the independent auditor requirement applicable to qualified plans with more than 100 plan participants.

Compliance

On December 9, 2008, the IRS gave 403(b) plan sponsors a one-year reprieve for adopting a written plan document. While the relief provisions from the IRS give 403(b) sponsors a full year to adopt a written plan document, the plans still must operate in compliance with 403(b) plan requirements. If a person has taken a 403(b) plan and their age is less than 59½, then they cannot initiate an early withdrawal unless they can demonstrate a triggering event such as financial hardship,

disability Disability is the experience of any condition that makes it more difficult for a person to do certain activities or have equitable access within a given society. Disabilities may be cognitive, developmental, intellectual, mental, physical, ...

, or separation from service. In this event, the IRS will also charge a mandatory 10% in federal taxes, and it is additionally taxed as ordinary income.

Bankruptcy protection before 2005

Before the passage of the bankruptcy reform act in 2005, a 403(b) that was not an ERISA plan was not accorded protected status as property that could be claimed as exempt by the debtor under the U.S. Bankruptcy Code. In ''In re Barnes'', 264 B.R. 415 (Bankr. E.D. Mich. 2001) Judge Spector held that the fixed-income annuity was not such a trust and could be reached by creditors. The variable account was held to fall within 541(c)(2) and was thus protected. Under the revised bankruptcy laws, 403(b) accounts, IRAs, and other retirement accounts are, in general, protected from

creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...

s in bankruptcy. For this reason, having an ERISA

anti-alienation clause An Anti-alienation clause is a provision in the governing document for an arrangement such as a trust that specifies that the beneficial or equitable owner of the property held in that arrangement cannot transfer the interest to a third party. Thi ...

Employee Retirement Income Security Act - ERISA - 29 U.S. Code Chapter 18
findUSlaw. Retrieved on 2016-09-02. was protective of pensions before the bankruptcy law revisions, giving those pensions the same protection as a spendthrift trust. Some critics argued that this is disparate treatment of similar pension schemes and that more consistent protection was called for. The

United States Congress The United States Congress is the legislature of the federal government of the United States. It is Bicameralism, bicameral, composed of a lower body, the United States House of Representatives, House of Representatives, and an upper body, ...

took this argument to heart in the 2005 bankruptcy reform.

After-tax contributions

Beginning in 2006, 403(b) and 401(k) plans may also include designated Roth contributions, i.e., after-tax contributions, which will allow tax-free withdrawals if certain requirements are met. Primarily, the designated Roth contributions have to be in the plan for at least five taxable years and you have to be at least 59 years of age.

References

External links