Which organizations are eligible for 403(b) plans?According to the IRS, a 403(b) plan, or tax-sheltered annuity (TSA), differs from a 401(k) in that it can only be offered by public schools and certain tax-exempt organizations, such as:
- An entity created under the section 501(c)(3) of the Internal Revenue Code.
- Public school systems
- Cooperative hospital service organizations
- Uniformed Services University of the Health Sciences (USUHS)
- Public school systems organized by Native American tribal governments
- Certain ministers
- Any 501(c)(3) institution which might include a not-for profit university, religious organization or social service agency
Who can offer a 401(k)?The 401(k) plan has greater latitude for employers and is offered widely across the United States, particularly at most large for-profit companies. Even many non-profit entities may choose to offer a 401(k). These non-profits are also eligible to present their employees with both a 401(k) and a 403(b) retirement plan option. In sum, almost any type of company may offer a 401(k) plan. Now that it’s clear which types of employers qualify for the 403(b), 401(k), or both, you’ll have to decide which option is the best fit for you and your employees. Before you make a decision as an employer, here is additional information to guide the process. Although there are similarities between the plans, they are not identical.
401(k) and 403(b): SimilaritiesHere’s what they have in common:
- In 2019, the maximum annual contribution is $19,000.
- The additional catch-up contribution for employees over age 50 is $6,000, for a total allowable contribution of $25,000.
- All company employees should be eligible to participate.
- The total employee elective deferral plus Roth IRA and after-tax contributions is limited to the lesser of $56,000 or 100% of the employee’s contributions. This limit includes the employer contributions as well. (403(b) participants have additional rules if they own 50% of another company which also has a 401(k) plan.)
- Both plans, the 401(k) and 403(b), may be terminated according to pre-determined plan governing rules.
- Both types of plans allow for a Roth (after-tax) option.
401(k) vs 403(b): Breakdown of Differences
|401(k) plan||403(b) plan|
|Investment options||Any investment option is allowed according to the Employee Retirement Income Security Act of 1974 (ERISA). Includes: mutual funds, annuity contracts and individually managed portfolios.||Annuity contracts or custodial accounts invested in mutual funds. (Churches may have additional options.)|
|15 year service catch-up||Not available||Allowed. If over age 50, must be applied before $6,000 over-age 50 catch-up is applied.|
|Plan hardship withdrawals||Allowed, after a specified number of years, certain age, disability or other predetermined event.||Allowed from annuity accounts, after a specified number of years, certain age, disability or other predetermined event. Hardship withdrawals from custodial accounts allowed only at age 59 ½ or upon disability.|
|Applicability of ERISA||In general, subject to ERISA.||Depends upon the circumstances and construction of the plan.|
|Transfers across investment alternatives within plan||Allowed (subject to any plan documents).||Allowed in most cases, if information-sharing agreements are in place and are within plan parameters.|
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