A 403(b) plan is a retirement savings plan which comes with significant tax benefits. The plans are typically aimed at cooperative hospital service organizations, public education bodies and some non-profit employers (only Internal Revenue Code 501(c)(3) entities) among others. The 403(b) plan is also referred to as a tax-sheltered annuity plan.
In comparison to the 401 (k) plan, the 403 (b) does not bear the same downsides which include discrimination testing. In addition to other limitations and administrative problems which face employer contributions under the Employee Retirement Income Security Act (ERISA), unless discrimination testing is not applicable.
The 403 (b) enjoys tax benefits which resemble that of the 401(k) plan. In principle, employee salary deferments are effected prior to tax remittances. They are also permitted to grow tax deferred up to the stage that the funds are levied as income in case of withdrawal from the plan.
With the changes instituted along the years the 403(b) and 401(k) plans have the capacity to include assigned Roth contributions. If such contributions stay in the plan for up to five taxable years, they in a position to take advantages of tax free withdrawals.
Salary deferral contributions enjoy some non-restrictive elements such as the fact that discrimination testing is non-applicable to them. Universal availability applies to the 403(b) plans in that employees are allowed to institute salary deferral contributions. In addition, the 403(b) plans come with uncomplicated and cheaper annual reporting requirements on IRS form 5500.
The 403(b) plans do not necessarily have to be qualified under the US Tax Code 401(a), but they still bear the identical characteristics of qualified plans. This is due to official conditions set by the Employee Retirement Income Security Act (ERISA). Although qualified and unqualified plans are essentially dissimilar in various respects they still come along as being identical to the participant since the options accessible are ideally the same.
Significant variations for the participant include supplemental means with which they are in a position to withdraw employer funds, prior to reaching the mandatory 59½ age restriction. However, this does not apply to salary deferral funds, unless the plan is funded using annuities instead of mutual funds.
As from December 11, 2008 the Internal Revenue Service grants 403(b) plan sponsors benefit from a one-year reprieve in connection with the adoption of a written plan document. At the same time, the plans are still expected to operate in conformity with 403(b) plan requirements.