Definition of 403(b) Plan

Definition of 403(b) Plan

What is a 403b plan?

A 403b plan definition is that it is a retirement savings plan that covers certain employees of public schools, tax-exempt organizations, and churches. 403b plans, or “tax-sheltered annuity plans,” typically involve pre-tax contributions, which benefit employee and employer income tax filings. However, employers can offer an after-tax option, as well.

Individuals who can participate in a 403(b) plan include:

  • Eligible employees of IRC Section 501(c)(3) tax-exempt organizations
  • Public school system eligible employees, as defined by IRC Section 170(b)(1)(A)(ii). This includes public schools, state colleges, and state universities
  • Eligible employees of churches
  • Ministers employed by IRC Section 501(c)(3) organizations
  • Employees of public schools established by Indian tribal governments

To reiterate, a tax-exempt organization, church, or public school system cannot offer a 403(b) plan unless they meet the requirements of the applicable Internal Revenue Code. Furthermore, unlike most 401(k) plans, most 403(b) plans are not subject to the Employee Retirement Income Security Act (ERISA) of 1974.

Allowable 403(b) plan contributions include:

  • Pre-tax elective deferrals. Employees agree to have their employer withhold a specific portion of their pay on a pre-tax basis. Employers must deposit these funds into the employee’s 403(b) account.
  • Nonelective employer contributions, which may include employer matching, discretionary, and mandatory contributions (if applicable).
  • Designated Roth contributions. Employees agree to have a specific portion of their pay withheld
  • on an after-tax basis by their employer. Employers must deposit these funds into the employee’s designated Roth 403(b) account.
  • Non-Royh designation after-tax employee contributions.

The importance of 403(b) plans to HR leaders

The rules surrounding 403(b) plans are complex, and a lack of knowledge can lead to noncompliance and penalties from the Internal Revenue Service (IRS). Therefore, human resource leaders in qualified tax-exempt organizations, public schools, and churches should have a detailed understanding of 403(b) plans.

This is key to determining whether the plan is appropriate for the institution and its workforce — and if so, how to properly implement and administer it.

Must-know 403(b) information for relevant HR leaders:

  • Contributions
  • Coverage and nondiscrimination
  • Financial advisor role
  • Loans and distributions
  • Management of the plan investments
  • Participation
  • Plan administration
  • Plan document
  • The plan’s design
  • The role of the plan sponsor
  • Third-party administrator role
  • When the plan terminates and the conditions for plan termination

HR leaders must also educate employees on the 403(b) program so that employees can make the best choices to meet their retirement goal plans.

Note that research concludes that choice is the primary factor fueling 403(b) participation and savings rates in school districts. For example, participation and savings rates are higher among plans with 15 or more investment providers instead of only 1 provider.

The history of 403(b) plans

The option for these plans started in 1958 when Congress added Section 403(b) to the Internal Revenue Code. This enabled certain tax-exempt organizations to offer their employees a savings device through a tax-sheltered annuity arrangement.

In 1961, 403(b) plans became available to public education employers. At that point in time, the only permitted investment vehicle involved annuities. Mutual funds that were held in custodial accounts were added as a viable investment strategy option in 1974.

In 1982, Section 403(b) was expanded to include retirement income accounts for eligible employees of churches.

In 1986, Section 403(b) was modified to impose specific rules — such as new ceilings on elective deferrals, withdrawal limitations, and nondiscrimination requirements.

Other terms similar to 403b that can assist you

  • 403(b) sponsor: An IRC-eligible employer that offers employees a 403(b) plan, such as an eligible tax-exempt organization or an eligible public school.
  • 401(k) plan FAQs: A list of questions (and answers) that employers often have about 401(k) plans.
  • Automatic enrollment: A retirement plan feature that enables employers to automatically deduct employees’ elective deferrals from their wages.
  • State-sponsored retirement plans: A retirement savings program sponsored by the state. These plans are typically structured as Roth IRAs. They tend to target private-sector employees in small and midsize businesses plus low-to-moderate income earners.
  • 403(b) administration: The process in which a 403(b) plan sponsor executes and manages its 403(b) plan obligations.
  • Federal rules for retirement plans: The federal guidelines governing retirement plans — e.g., Internal Revenue Code (IRC), Employee Retirement Income Security Act (ERISA), and Setting Every Community Up for Retirement Enhancement (SECURE) Act.
  • 403(b) vendors/providers. Third-party entities that provide 403(b) plan solutions to employers — e.g., financial advisors, recordkeepers, and plan administrators.

Summary of 403b plans

403(b) plans are retirement savings plans offered by IRS-qualified tax-exempt organizations such as public school systems and churches. To provide a 403(b) plan, these organizations must meet the criteria of the applicable Internal Revenue Code.

HR leaders in these organizations need a sound knowledge of 403(b) regulations in order to make informed decisions about the plan. They must also be adept at educating employees about their 403(b) plan options.

Similar Glossary definitions you must know


The Employee Retirement Income Security Act (ERISA) is a sweeping federal law that sets the standards for most employer-sponsored health and retirement plans, including disclosure and reporting criteria.

Pre-tax Deductions

Money deducted from an employee’s wages before applicable payroll taxes are withheld. Pre-tax deductions reduce the employee’s taxable wages.

After-Tax Contributions

Taking out income taxes and other wage deductions prior to applying contribution deductions. After-tax contributions do not reduce the employee’s taxable wages.

Non-Qualified Plan

A retirement plan that is not subject to ERISA. Nonqualified plans are often deferred compensation arrangements. In these plans, the employer agrees to delay paying a portion of an employee’s compensation until a later date.

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