403(b) plan

A 403(b) plan is a retirement savings vehicle designed specifically for employees of public schools, colleges, universities, and certain tax-exempt organizations. Similar to a 401(k) plan offered by for-profit companies, a 403(b) allows participants to save for retirement on a tax-advantaged basis.

Learn more: How to set up a 403(b) plan

Pre-tax contributions

One of the key benefits of a 403(b) plan is the ability to make pre-tax and post-tax contributions through payroll deductions. WIth pre-tax contributions, this means that the money you contribute to your 403(b) account is deducted from your paycheck before taxes are applied, effectively reducing your taxable income for the year. Your contributions then grow tax-deferred until you withdraw them in retirement, at which point they are taxed as ordinary income.

Roth contributions

If elected in the plan document, 403(b) plans may also offer a Roth contribution option. With Roth contributions, you make contributions on an after-tax basis, meaning the funds are taxed before being contributed to your account. When you take qualified distributions in retirement, both your contributions and any earnings on those contributions are distributed tax-free if certain requirements are met. Participants may choose to make traditional pre-tax contributions, Roth contributions, or a combination of both, subject to the plan's provisions and annual IRS contribution limits.

Employer contributions

Another advantage of participating in a 403(b) plan is the potential for employer contributions. These can come in two main forms: matching contributions and profit-sharing. 

With matching contributions, your employer may match a portion of what you contribute to your account—for example, matching 50% or 100% of your contributions up to a certain percentage of your salary. 

Some employers also make profit-sharing contributions, which are discretionary amounts they can contribute to your account regardless of whether you contribute yourself. Despite its name, profit-sharing contributions aren't tied to company profits, but instead is a contribution chosen to be contributed by the employer and allocated to eligible employees based upon the plan document criteria.

These employer contributions help accelerate your retirement savings growth, essentially providing additional compensation for your retirement. However, not all 403(b) plans offer employer contributions, so it's important to check with your employer about available options.

Testing requirements for 403(b) plans

403(b) plans maintain specific exemptions from certain qualification requirements that apply to 401(k) plans:

1. Top-Heavy Testing Exemption: 403(b) plans are not subject to top-heavy testing requirements under IRC Section 416.

2. ADP Testing Exemption: 403(b) plans are exempt from Actual Deferral Percentage (ADP) testing requirements that typically apply to 401(k) plans under IRC Section 401(k).

Who is eligible to participate in a 403(b) plan

Generally, employees of certain non-profit organizations and public sector employers are eligible to participate. This includes:

• Employees of public schools, including K-12 schools, colleges, and universities 

• Faculty and staff at private colleges and universities

• Employees of certain 501(c)(3) non-profit organizations, such as religious institutions, hospitals, and charitable organizations

• Some employees of cooperative hospital service organizations or affiliated church organizations

It's important to note that while these types of employers can offer 403(b) plans, not all of them do. Employers have discretion over whether to provide this retirement benefit. Some employers eligible for 403(b) plans may choose to offer a 401(k) plan instead.

403(b) plans are subject to universal availability rules, which require employers to offer all eligible employees the immediate opportunity to make elective deferrals. While universal availability ensures broad participation, plans may establish eligibility requirements for employer contributions, such as requiring employees to reach age 21 or complete up to one year of service before receiving matching contributions.

Exclusion rules

The IRC permits certain employee classifications to be excluded from 403(b) plan participation. Permitted exclusions include:

• Students performing services at educational institutions

• Employees who work fewer than 20 hours per week

• Employees who participate in another employer-sponsored deferral plan through the same employer

• Non-resident aliens who have no U.S.-source income

• Employees who make a one-time election to opt out of participation

500 hour rule for long-term, part-time employee

Beginning January 1, 2025, under SECURE 2.0 Act provisions, long-term part-time employees who complete at least 500 hours of service in two consecutive 12-month periods must be permitted to participate in the plan, regardless of any hours-per-week exclusion in the plan document.

What are the contribution limits for a 403(b) plan

As of 2025, employees participating in a 403(b) plan can contribute up to the 402(g) limit of $23,500 per year on a pre-tax basis, which is combined with 401(k) plan deferrals for those with both types of plans. This means contributions are deducted from the employee's gross income, reducing taxable income for the year. Employees age 50 or older can make an additional catch-up contribution of $7,500, allowing for a total annual contribution of $31,000. While 403(b) plans can offer a 15-year special catch-up provision (more on that below) if elected in the plan document, Human Interest does not provide this feature.

15-Year service catch-up contributions

The 15-year service catch-up provision offers certain 403(b) participants an opportunity to make additional contributions beyond standard limits. Employees who have served with their current eligible employer for at least 15 years may qualify to contribute up to $3,000 more annually, provided they have not maximized their contributions in previous years. This special provision has a lifetime maximum of $15,000 in additional contributions. To be eligible, employees must have contributed an average of less than $5,000 annually during their years of service. The 15-year service catch-up must be utilized before applying any age 50 or older catch-up contributions. It's important to note that this provision requires specific calculations based on contribution history and must be explicitly permitted by the plan document.

Learn more: How a 401(k) plan compares to a 403(b) plan?