403(b) Plans – Not Your Average Salary Deferral Plan

Congress continues to pass laws that move 403(b) plans ever closer to 401(k) plans, but 403(b) plans remain distinct. Understanding these differences allows you to maintain a compliant plan that best serves the needs of your participants. Special aspects of 403(b) plans include the following:

Types of Plan Sponsors

Not just any type of employer is permitted to sponsor a 403(b) plan. Only public schools – both K-12 and higher education institutions; tax-exempt entities under Internal Revenue Code (Code) section 501(c)(3); and churches can sponsor a 403(b) plan.

ERISA Coverage

Some 403(b) plans are subject to ERISA and some are not. Governmental (including public school) plans and non-electing church plans (i.e. not electing to be covered by ERISA) are generally exempt from ERISA coverage. In addition, ERISA contains a safe harbor that allows certain salary-deferral-only 403(b) plans of tax-exempt employers to avoid ERISA when the employer has very limited involvement with the plan, serving more to facilitate its employees’ payroll deductions to their own retirement.

Universal Availability

As a general rule, all employees must be allowed to defer money into the plan immediately upon hire. This means there generally cannot be eligibility requirements for salary deferrals into a 403(b) plan and employees must be provided notice of their right to defer when they are hired and annually thereafter. There are a few limited exceptions to this rule that permit the plan sponsor to exclude those who work less than 20 hours per week, certain students, non-resident aliens, and employees who participate in another 401(k), 403(b), or 457(b) plan. This list could be shrinking as of 2025 under SECURE 2.0 which will require that all long-term part-time employees who worked at least 500 hours in the prior two years be allowed to participate. See our prior blog for more details.

Special 15-Year Catch-up Contributions

403(b) plans can include an additional catch-up contribution provision in addition to the normal age 50 and older catch-up. Participants who have 15 years of service may contribute the lesser of (i) $3,000, (ii) $15,000 (reduced by deferrals made under the rule for prior years (pre-tax and Roth), or (iii) $5,000 times the number of years of service minus total elective deferrals made by the employer on the participant’s behalf. Remember that this contribution is subject to the overall Code section 415(c) limit, while normal catch-up contributions are not.

Contributions on Behalf of Former Employees

A 403(b) plan may include a provision that allows employers to make non-elective contributions to a former employee’s account for five years after the employee’s date of severance. No portion of these contributions can come from money otherwise payable to the former employee by the employer and must cease at the death of the former employee.

Investment Choices

The Code specifies the types of investments available to 403(b) plans and they are limited. Many 403(b) plans, especially those at K-12 schools are referred to as TSA plans, or “tax-sheltered annuity plans”. This name is related to the original type of investment available to 403(b) plans – an annuity contract offered through an insurance company. A 403(b) plan may also offer a custodial account invested in mutual funds. Finally, church plans may include a retirement income account. SECURE 2.0 added collective investment trusts to this list, but because federal securities law prohibits 403(b) investment in CITs, they will remain unavailable as an investment vehicle without further legislation. See our prior blog. Unlike 401(k) plans, there is no trust requirement for 403(b) plans.

These unique features of 403(b) plans allow additional planning opportunities for 403(b) plan sponsors. If you would like to discuss these opportunities or have any questions about your 403(b) plan, please contact any of Bricker Graydon’s Employee Benefits attorneys.

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