What Is a 403(b)?

A 403(b) is a retirement savings account for public educational institutions and nonprofits.

Written by Laurel Kenner / July 25, 2022

Quick Bites

  • 403(b) plans let employees of public educational institutions, nonprofits and religious organizations save for retirement in tax-advantaged accounts.
  • 403(b)s are a lot like their for-profit 401(k) counterparts.
  • Employers usually offer a choice of annuities, mutual funds and after-tax Roth accounts.

403(b)s are the nonprofit world’s version of 401(k) retirement savings plans, though they’re clearly not as well-known. Employees of public schools, churches and non-governmental organizations are able to access 403(b)s in lieu of 401(k)s, because everyone should be saving for retirement. There are some minor differences between 403(b)s and 401(k)s. We’ll explain more in this story.

Inside this article

  1. How does a 403(b) plan work?
  2. 403(b) plans vs. 401(k) plans
  3. Contribution limits to a 403(b)
  4. Pros and cons of a 403(b)

How does a 403(b) plan work?

A 403(b) plan is a retirement plan for nonprofits and other similar groups.

The idea is simple. An employer sets up a plan, and employees choose whether to participate and how much to put in. The employer then withholds the sum from the worker’s pay and invests it in the plan.

Most employers can sweeten the pot by making contributions of their own to employee accounts, but they don’t have to.[1]

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The idea of tax-advantaged retirement savings for nonprofits has been around since the 1950s. The 403(b) was created at that time to provide retirement savings plans for employees of nonprofits. For-profit companies get a tax deduction for offering savings plans, but nonprofits had no incentive to do so because they don’t get to take tax deductions. So nonprofit employees were left out—until insurance companies saw their plight as an opportunity to market annuities.

The first 403(b) plans offered only annuities. In the 1970s, mutual funds got into the act. Today’s 403(b)s typically offer a choice of annuities and mutual funds. Most now include a Roth feature where a worker can make after-tax contributions, let earnings on investments grow tax-free and pay no taxes when they finally start taking out the money. [3]

“403(b)s have evolved to look very much like 401(k)s,” says Danny Miller, a partner in the Washington, D.C., office of Conner & Winters, LLP, a Tulsa-based law firm.

The plans are rarely administered in-house. Instead, they’re handled by external record keeping services offered by firms such as Fidelity and Charles Schwab.

As of 2017, the latest date for which information is available, 6.78 million of America’s 12.5 million nonprofit workers held 403(b) accounts, with total estimated assets of $1 trillion.[2,3]

403(b) plans vs. 401(k) plans

While 403(b) and (401(k) plans are very much alike, there are a couple of differences:

  • Ensuring fairness. Congress, in attempting to make retirement savings plans fair for people in different pay grades, took slightly different approaches with 401(k)s and 403(b)s. For-profit companies can let highly paid employees put money in than lower-paid workers do—but only up to a point. Each year, the employer runs a test comparing the average contributions for highlys and non-highlys to make sure the difference isn’t too outrageous, and makes any fixes necessary to meet the guidelines. A 403(b) plan doesn’t have to perform this annual “average deferral percentage” analysis; however, a 403(b) plan must be universally available to employees. Church plans are exempt from the universal availability requirement.[4]

  • Employer contributions past retirement. Employers can keep making contributions to a 403(b) plan for up to five years after the employee’s departure (as long as the contributions are made on a non-discriminatory basis). That’s not the case with 401(k)s: contributions stop when the worker leaves.

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How much can you contribute to a 403(b)?

The amount is adjusted each year for inflation. The most you can contribute from your salary in 2022 is $20,500.[5]

Warning! If you have more than one retirement plan, the $20,500 limit applies to your total contributions to all of the plans (with, of course, certain exceptions.) The rules are tricky, so talk this over with a retirement adviser.

If your employer is contributing to your account, the combined total of yours and theirs can’t exceed $61,000 in 2022 (or 100% of your includible compensation for your most recent year of service, whichever is less.) The ceiling on contributions to multiple accounts doesn’t apply to employers.

What's the 403(b) Maximum Contribution?

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Employees of nonprofit organizations, schools and churches can defer up to $20,500 per year into their 403(b) plan. They may also be eligible for employer contributions and certain catch-up contributi

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The year you turn 50, you can start making significant catch-up contributions—up to $6,500 in 2022. (Ceilings on contributions to multiple accounts apply here, too, so this is another thing to talk over with your tax adviser.)

Pros and cons of a 403(b)

One major advantage of the 403(b) is that the employer can keep contributing to an employee’s account for up to five years after retirement. That isn’t an option for 401(k) plans.

Some people might be reluctant to consider a 403(b)s because they aren’t as well known as 401(k)s. The fact is, they are pretty much the same.

With growth in the U.S. nonprofit sector topping 12.5 million in 2017, maybe 403(b)s will eventually become as famous as their for-profit-sector counterparts.[6]

Article Sources
  1. “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at ERISA 403(b) Plans, 2017.” Page 1. Investment Company Institute, Jan. 2021. https://www.ici.org/doc-server/pdf%3A21_ppr_dcplan_profile_403b.pdf
  2. “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at ERISA 403(b) Plans, 2017.” Exhibit 1.4, p. 10. Investment Company Institute, Jan. 2021. https://www.ici.org/doc-server/pdf%3A21_ppr_dcplan_profile_403b.pdf
  3. “Contributions to a 403(b) Plan,” National Tax-Deferred Savings Association. https://www.ntsa-net.org/industry-intel/tech-talk/contributions-403b-plan
  4. “To 403(b) or Not to 403(b)? Retirement Plan Options for Churches,” Danny Miller, National Tax-deferred Savings Association, 403(b) Adviser, Spring 2013. https://www.ntsa-net.org/sites/ntsa-net.org/files/PDFs/Pages%20from%20403bAdvisor-SP13-FINAL-hirez-4.pdf
  5. “IRC 403(b) Tax-Sheltered Annuity Plans,” Internal Revenue Service. https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans
  6. “The 2020 Nonprofit Employment Report,” Johns Hopkins University Center for Civil Society Studies, Nonprofit Economic Bulletin No. 48, May 2020. https://fano.org/wp-content/uploads/2020/06/2020-Nonprofit-Employment-Report_FINAL_6.2020.pdf

About the Author

Laurel Kenner

Laurel Kenner

Laurel is a seasoned, award-winning journalist with over 20 years of experience. She is an accomplished financial commentator and co-author of Practical Speculation, a book on statistical analysis in investment. Laurel brings clarity and context to writing and is skilled at making complex issues easy to understand.

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