403b Plans

A 403(b) is a tax-deferred retirement plan that can be established by two general categories of employers: schools (public school systems, state colleges and universities) and tax-exempt 501(c)(3) organizations (charities, hospitals and religious organizations). A 403(b) plan is also called a tax-sheltered annuity or TSA plan. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees' accounts.

It is similar to a 401(k) plan maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until it's distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently but is tax-free (including earnings) when distributed.

Eligible employers are a:

  • public school, college, or university,
  • church, or
  • charitable entity tax-exempt under Section 501(c)(3) of the Internal Revenue Code

In a typical 403(b) plan, employees in a qualifying organization defer a portion of their salaries into individual accounts according to a salary reduction agreement with the employer.

The salary reduction agreement applies to the employee’s future earnings. If the agreement is ever modified, the modification will only affect the employees subsequent earnings.

Salary deferrals, while exempt from current federal income tax up to certain limits, are still subject to social security and Medicare withholding taxes.

The employer may also make contributions up to certain limits.

Learn more

Participate in a 403(b) plan
The following employees are eligible to participate in a 403(b) plan:

  • Employees of tax-exempt organizations established under IRC Section 501(c)(3).
  • Employees of public school systems who are involved in the day-to-day operations of a school.
  • Employees of cooperative hospital service organizations.
  • Civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS).
  • Employees of public school systems organized by Indian tribal governments.
  • Certain ministers if they are:
    • Ministers employed by Section 501(c)(3) organizations.
    • Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.
    • Ministers (chaplains) who meet both of the following requirements.
      • They are employed by organizations that are not Section 501(c)(3) organizations.
      • They function as ministers in their day-to-day professional responsibilities with their employers.

Universal availability rule
The "universal availability rule" means 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.

The employer may exclude certain employees from the plan:

  • Employees who will contribute $200 or less annually
  • Those employees who participate in a 401(k) or 457b plan or in another 403(b) plan of the employer
  • Nonresident aliens
  • Employees who normally work less than 20 hours per week
  • Students performing services described in IRC Section 3121(b)(10)

The Process

  • The employee defers a portion of pre-tax salary into the 403(b) through a salary reduction agreement with the employer.
  • A salary reduction agreement cannot be retroactive, and can only apply to earnings starting on the day of implementation and going forward. The same is true for any modification of the salary reduction agreement.
  • Deferrals, while exempt from current federal income tax (unless designated as Roth deferrals), are still subject to Social Security and Medicare withholding taxes.
  • The employer may elect to contribute to the 403(b).


  • There are annual limits on elective employee deferrals into a 403(b) plan, although additional contributions are permitted for participants age 50 and over. Employees elect the amount they would like to defer within these limits.
  • The annual limit for participants under age 50 is $23,000 in 2024. For participants age 50 and over, the limit is $30,500. However, for participants with 50 years of service or more with the employer, the annual limit is increased by an additional $3,000.
  • If the employer contributes, the total contribution can exceed these limits, but must not exceed the lesser of 100% of compensation or $69,000 in 2024 ($76,500 if age 50 or older).

What’s the Tax Treatment?

  • Amounts deferred into the 403(b) plan are not currently taxed to the employee unless made on an after-tax basis, including those designated as Roth deferrals. Earnings inside the account accrue on a tax deferred basis until they’re withdrawn.
  • Employer contributions are deductible by the employer in the year they’re made.
  • Employee withdrawals from the 403(b) account -except amounts representing a return of the employee’s nondeductible contributions -are taxed as ordinary income. Roth deferrals are the exception, as they may be withdrawn tax free when certain requirements are met.
  • The special tax treatment available for lump-sum distributions to certain grandfathered participants in other qualified retirement plans is not available to 403(b) participants.


  • While a 10% penalty tax generally applies to withdrawals taken before age 59 1/2 employees may avoid this penalty under certain conditions. Among them:
    • The employee leaves the employer after age 55, dies, or becomes totally disabled.
    • The employee receives the distribution as a series of substantially equal periodic payments for life (or life expectancy).
    • The employee receives the distribution for medical care, within certain limitations.
    • The employee takes the distribution upon the birth or adoption of a child.
    • The distribution is payable to an alternate payee under a “qualified domestic relations order” as defined by the IRS or by state law.
    • The distribution is to correct an earlier excess contribution or excess elective deferral.
  • Required minimum distributions from a 403(b) plan generally must begin no later than April 1 of the year following the year when the employee reaches age 73. However, distributions may be deferred until the employee’s actual retirement if it occurs later than 73.
  • Participants who fail to comply with the RMD rules face a 25% penalty tax on the amount that should have been distributed but was not. The penalty drops to 10% if the distribution error is corrected quickly.

Are There Contribution Limitations?
There are limits to how much an employee can defer into the account each year depending, among other things, on the person’s age. The 2024 limit is $23,000 ($30,500 for people age 50 and over). However, for participants with 15 years of service or more with the employer, the annual limit is increased by an additional $3,000.

There is also an overall limit on annual additions to the account from all sources -including any employer contributions. In 2024 the limit is 100% of the employee’s compensation or $69,000 ($76,500 if age 50 or older), whichever is lower.

Pros and Cons:

  • Flexibility in contributions
  • Investment options are limited to those chosen by the employer
  • may have high administrative costs
  • optional loans and hardship distributions add flexibility for employees

Contribution Type - Employee salary deferrals; employer may contribute.

Contribution limits – Total contributions to each employee’s 403(b) account or annuity are limited.

Filing requirements - Certain 403(b) plans may be subject to annual Form 5500 filing requirements.

Participant loans - Permitted if the terms of the plan allow loans.

In-service withdrawals - Yes, but subject to possible 10% penalty if under age 59-1/2.

The Bottom Line

403(b) plans offer an efficient, tax-advantaged way to prepare for retirement, often with a boost from employer contributions. The key to maximizing potential 403(b) retirement income is to start early, take full advantage of any matching employer contributions, and defer as much out of current earnings as the contribution limits allow.

For further reading, visit: https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.