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403(b) Plan

Last Updated April 16, 2013

Definition

Also referred to as a tax sheltered annuity (TSA), is a retirement plan established by a nonprofit- tax-exempt organization as described under IRC § 501(c)(3) , public school systems including those organized by Indian tribal governments , cooperative hospital service organizations, Uniformed Services University of the Health Sciences (USUHS) for their employees, and certain ministers.

Under a 403(b) plan, eligible employees may defer a portion of their wages/salary to their account under the plan. These deferred amounts are referred to as Salary-Deferral Contributions, and can be made on a pre-tax and/or post-tax basis.

Contributions under a 403(b) plan can be invested in :

  • An annuity contract as described under IRC § 403(b)(1),
  • A custodial account as described under IRC § 403(b)(7) , where investments are limited to regulated investment companies described in IRC §851(a)(1)(A) :or
  • A retirement income account as described under IRC § 403(b)(9), for which there is usually no restriction on investments

Earnings in a 403(b) account grow on a tax-deferred basis and distributions are treated as ordinary income

 

Individuals may defer up to 100% of their compensation up to the dollar limit that is in effect for the year to the plan. Individuals who reach age 50 by the end of the year may defer additional amounts referred to as ‘Catch-up’ contributions.

The dollar limits from 2002 are as follows:

 

Year

403(b) Deferral Limit

 

Year

403(b)  Catch-up Limit

2002

$11.000

2002

$1,000

2003

$12,000

2003

$2,000

2004

$13,000

2004

$3,000

2005

$14,000

2005

$4,000

2006

$15,000

2006

$5,000

2007

$15,500

2007

$5,000

2008

$15,500

 

2008

$5,000

2009

$16,500

 

2009

$5,500

2010

$16,500

 

2010

$5,500

2011

$16,500

 

2011

$5,500

2012

$17,000

 

2012

$5,500

2013

$17,500

 

2013

$5,500

2014

 

 

 

 

 

These are the limits established under federal law. However, an employer may elect to reduce the percentage of salary that an employee may defer to its 403(b) plan. For instance, the plan may be designed to limit Salary Deferrals to 10% of compensation. In such a case, if the individual’s compensation for the year is $70,000, the maximum amount he/she can contribute as salary deferral contributions for the year is $7,000 ($70,000 x 10%).

403(b)s are subject to other rules that may allow contributions in excess of these amounts. For example, the 15-year rule.

Employers may choose to make matching contributions to the accounts of employees who make salary deferral contributions.

Referring Cite

IRC § 403(b),IRS Publication 571

Additional Helpful Information

  • FIELD ASSISTANCE BULLETIN –FAB  2009-02: ANNUAL REPORTING REQUIREMENTS FOR 403(b) PLANS : This Bulletin provides guidance on certain Form 5500 Annual Return/Report requirements for tax-sheltered annuity programs described in section 403(b) of the Internal Revenue Code (Code) with respect to contracts issued before January 1, 2009. The guidance in this Bulletin relates solely to Form 5500 reporting obligations and does not address any other issue under Title I of ERISA or any obligations under the Code
  • Revenue Ruling 2009-18: Makes some previous 403(b) guidance obsolete