In the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

, a 403(b) plan is a U.S.

tax A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

-advantaged retirement savings plan available for

public education A state school, public school, or government school is a primary school, primary or secondary school that educates all students without charge. They are funded in whole or in part by taxation and operated by the government of the state. State-f ...

organization An organization or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -ization), see spelling differences) is an legal entity, entity—such as ...

s, some

non-profit A nonprofit organization (NPO), also known as a nonbusiness entity, nonprofit institution, not-for-profit organization, or simply a nonprofit, is a non-governmental (private) legal entity organized and operated for a collective, public, or so ...

employers (only

Internal Revenue Code The Internal Revenue Code of 1986 (IRC), is the domestic portion of federal statutory tax law in the United States. It is codified in statute as Title 26 of the United States Code. The IRC is organized topically into subtitles and sections, co ...

501(c)(3) A 501(c)(3) organization is a United States corporation, Trust (business), 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 ...

organizations), cooperative hospital service organizations, and

self-employed Self-employment is the state of working for oneself rather than an employer. Tax authorities will generally view a person as self-employed if the person chooses to be recognised as such or if the person is generating income for which a tax return ...

ministers in the

. It has tax treatment similar to a 401(k) plan, especially after the

Economic Growth and Tax Relief Reconciliation Act of 2001 An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated wit ...

. Both plans also require that distributions start at age 72 (according to the rules updated in 2020), known as Required Minimum Distributions (RMDs). Distributions are typically taxed as ordinary income. 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. Tax ...

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 an investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in ...

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 deb ...

of the account holder, but this advantage ceased to exist after the October 2007 Bankruptcy Abuse Prevention and Consumer Protection Act 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 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 Discrimination is the process of making unfair or prejudicial distinctions between people based on the groups, classes, or other categories to which they belong or are perceived to belong, such as race, gender, age, class, religion, or sex ...

testing. Salary-deferral contributions are not subject to 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 Federal government of the United States, United States federal government, which is responsible for collecting Taxation in the United States, U.S. federal taxes and administerin ...

(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 disability, cognitive, Developmental disability, d ...

, 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 propert ...

s in bankruptcy. For this reason, having an ERISA anti-alienation clauseEmployee 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, legislative branch of the federal government of the United States. It is a Bicameralism, bicameral legislature, including a Lower house, lower body, the United States House of Representatives, ...

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.

Church plans

A church plan is a retirement plan established and maintained by a tax-exempt church, a convention of churches, or an association of churches for its employees. Church plans are not subject to the Employee Retirement Income Security Act of 1974 (ERISA) unless it voluntarily makes an irrevocable election to be subject to ERISA.C.F.R. § 1.410(d)-1. A church plan may be a defined benefit plan, a defined contribution plan, or a

deferred compensation Deferred compensation is an arrangement in which a portion of an employee's wage is paid out at a later date after which it was earned. Examples of deferred compensation include pensions, retirement plans, and employee stock options. The primary ...

plan.Sciscoe, Tara Schulstad (2017).
Church Retirement Plans
. ''Ice Miller LLP''. A church plan that is not subject to ERISA is not required to file an IRS Form 5500, nor is it required to distribute summary annual reports, summary plan descriptions, or summaries of material modifications to plan participants. Church plans are generally subject to state law though. A defined benefit church plan is not required to pay subject to Pension Benefit Guaranty Corporation plan termination insurance.

References

External links

Text of the Employee Retirement Income Security Act - ERISA - 29 U.S. Code Chapter 18

Publication 571 (12/2009), Tax-Sheltered Annuity Plans (403(b) Plans)
{{Authority control 0403b Retirement plans in the United States Tax-advantaged savings plans in the United States