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403(b) Plans

Posted by Paul D. Woodard | Mar 16, 2017 | 0 Comments

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Today, employers may offer many different retirement plan options to their employees as a benefit to employment. Between a 401(k), 403(b), and 457(b), it can be difficult to keep track of what a particular code plan is and if it is right for you. With so many IRS codes and acronyms floating around, it is vital for employees moving to a new job to understand the retirement plan options available to them as well as the limitations of the retirement plans offered by their new employer.

What is a 403(b) plan?

A 403(b) plan is named after the Internal Revenue Code (IRC) Section 403, which details the plan. Essentially, an. A 403(b) plan is a retirement plan that allows employees to make contributions on a pre-tax basis, similar to a 401(k).

Are there contribution limits for participating in a 403(b) plan?

Like most retirement plans, there are annual contribution limits for 403(b) plans. Similar to a 401(k) or 457(b), employee elective salary deferrals are limited to $18,000 for 2017. Employees who are age 50 and over can also make catch-up contributions of $6,000 (for 2017) beyond the basic limit on elective deferrals. The limit on annual additions (the combination of all employer contributions and employee elective deferrals to all 403(b) accounts) generally is the lesser of: (1) $54,000 for 2017, or (2) 100% of the employee's includible compensation for the employee's most recent year of service.

Who can participate in a 403(b) plan?

Not any employee is eligible to participate in a 403(b) plan. These plans are only available for certain employees of public schools, employees of cooperative hospital service organizations, employees of 501(c)(3) organizations, and certain religious ministers. Eligible employers can set up a 403(b) plan for their employees to participate in. Contributions are generally made by employee elective deferrals. While employers are not required to make any contributions, some employers offer matching contributions. Leased employees are not eligible to participate in an employer's 403(b) plan.

What is the Universal Availability Rule?

The “universal availability rule” provides that if an employer permits one employee to defer salary into a 403(b) plan, the employer must extend this offer to all employees of the organization. However, the employer can exclude certain employees from the plan, including: (1) employees who contribute $200 or less annually; (2) those employees who participate in a 401(k) or 457(b) plan or another 403(b) plan of the employer; (3) nonresident aliens; (4) employees who normally work less than 20 hours per week; and (5) students performing services described in IRC Section 3121(b)(10).

What investment options are available to 403(b) plans?

403(b) plans were previously known as “tax-sheltered annuities” because they limited investment options to annuity products. However, after the tax code was changed in 1974, the investment options available to 403(b) plans now include an annuity contract with an insurance company, a custodial account invested in mutual funds, or a retirement account for certain church employees.

Can an employee participate in a 403(b) plan and an additional retirement plan?

Yes. It is not uncommon for eligible 403(b) employees to also be covered by some other type of retirement plan. However, employees must combine contributions made to their 403(b) accounts with contributions made to all other plans in which they participate (other than 457 plans), including 401(k)s, other qualified plans, and SIMPLE IRAs. The employee's total elective deferrals to all of these plans combined cannot exceed the annual deferral limit of $18,000 for 2017.

Are 403(b) plans subject to the standards set forth in the Employee Retirement Income Security Act of 1974 (ERISA)?

It depends. ERISA provides minimum standards for most private pension and health plans. However, public school districts, governmental organizations, churches, church-controlled organizations or 414(e) religious organizations, are not subject to ERISA. These organizations are exempt from the nondiscrimination rules for non-elective contributions to their 403(b) plans. All other 501(c)(3) nonprofit employers are subject to ERISA when employer contributions are made to the plan.

Can a 403(b) plan be rolled over into a different retirement plan?

Yes, depending on the language of the 403(b) plan document. Today, most employees end up transitioning through several jobs over their career. As such, workers may be concerned that one retirement plan is not portable to the new job, and they will end up with a patchwork of plans with different companies. To alleviate this concern, in most cases, a 403(b) can be rolled over into another 403(b), or into a traditional IRA, or Roth IRA.

Are loans from a 403(b) plan permitted?

It depends. Loans may be allowed at the employer's discretion. If permitted, the amount of the loan would be subject to certain limitations. For non-ERISA plans, the employee can borrow the greater of one-half of the vested account values or $10,000. For ERISA plans, the limitation is 50% of the vested values capped at $50,000, minus the difference between the highest outstanding loan balance in al plans of the employer in the previous 12 months, and the amount still outstanding when a new loan is taken.

A 403(b) plan may be a great option for your employees if you meet all the necessary requirements. If you have any questions about providing retirement benefits for your employees or you are planning for your own retirement, Butterfield Schechter LLP is here to help. We will answer all your questions and make sure your retirement plan is set up to meet your goals and protect you and your family in the future. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.

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