1. What is a 403(b) Plan? 5 things you probably didn’t know about 403(b) plans

You’ve probably heard of 401(k) plans, but do you know what a 403(b) plan is? A 403(b) plan is a type of retirement plan similar to a 401(k) plan, but only employees of public schools, hospitals, some ministries, and certain other not-for-profit or 501(c)(3) organizations may set up and participate in a 403(b) plan. A 403(b) plan is sometimes also referred to as tax-sheltered annuity (TSA) plan. They are group retirement plans offered through your job or workplace. You and your employer may make contributions to an individual account set up for you within the plan.

But you probably already knew that. Here’s 5 things you probably didn’t know about 403(b) plans:

1. The name 403(b) comes from the section of the Internal Revenue Code

2. If you have 15 or more years of service, you can contribute an extra $3,000 per year as a catch-up contribution

3. Your employer may make contributions into your account for you for up to 5 years after you terminate employment

4. Many 403(b) plans allow you to borrow from your account in an amount of up to $50,000.

5. If you are income eligible, you may be eligible for a $1,000 savers credit ($2,000 if filing jointly) on your federal income tax return just for contributing to a 403(b) plan

How are 403(b) plans different than 401(k) plans? Besides only being offered to employees of certain not-for-profit organizations and public employees, the investments allowed in a 403(b) plan are also different than in an Individual Retirement Account (IRA) or 401(k) plan. Most 403(b) plans invest in fixed or variable annuity products, although mutual funds are also allowed.

A 403(b) plan allows the participating employee to elect to make contributions to the 403(b) plan via payroll deductions on a tax-deferred basis. A participating employee would agree to allow the employer to reduce his or her paycheck by a certain dollar amount or percentage, for example, 5% of pay. Then each payday, the employer would deduct that amount or percentage BEFORE Federal and State taxes are calculated, and deposit that amount into the employee’s individual 403(b) account in the plan.

The school or hospital may also make matching contributions to the participating employees’ 403(b) plans, but it is not required that they do so. The most common contribution is in the form of a match of a certain amount or percentage of the employees’ contributions. For example, the employer match may be a formula stated as, “50% of employee contributions, up to a maximum of 5% deferred.” In this instance, for example, if an employee deferred 5% of his or her salary into the 403(b) plan, the employer would contribute 2.5% of the employee’s salary into the 403(b) plan (50% of 5%.)

A 403(b) plan can be an effective way to reduce income taxes and accumulate savings for retirement. If your school, hospital or not-for-profit organization offers one, I would encourage you to join it. If your organization does not offer a 403(b) plan, you should ask the administrator or suggest to the Human Resources Department that a 403(b) plan can be a cost-effective employee benefit, allowing the organization to recruit and keep top talent, and providing a shared cost for the employee’s retirement funding.

NEXT: WHY SHOULD I JOIN THE 403(b) PLAN AT WORK?

DISCLAIMER: The information expressed herein is for informational purposes only and is not to be construed as tax or legal advice. The opinions expressed are solely those of the author.

BIO: Nora Bethman, CEBS, QKA, ERPAPresident, National Employee Benefit Services, Inc.

Ms. Bethman is the owner of National Employee Benefit Services, Inc., a Third Party Retirement Plan Administration firm in Lincolnshire, IL. She has over 20 years of experience as a qualified retirement plan administrator. She has extensive experience in 403(b) plan setup, administration, and problem resolution. Contact 847-808-0940 or info@nebspensions.com for a free retirement plan review to see how your organization can start or improve its retirement program, or visit www.nebspensions.com for more information.