403(b) Plans
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403(b) Plans

A 403(b) plan is a special type of retirement arrangement for employees of certain tax-exempt organizations and public educational organizations. Another common reference for a 403(b) plan is a “tax sheltered annuity” or “TSA”. The term “tax sheltered annuity” originated because initially an employer could fund a 403(b) plan only with annuity contracts purchased from an insurance company. Congress later amended the Code to permit an employer to fund a 403(b) plan with mutual funds as well.

A 403(b) plan usually falls into one of three types: 1) salary reduction only plan; 2) employer funded plan which includes a salary reduction feature; or 3) church plan (retirement income account).

The salary reduction plan is a popular type of 403(b) and is the easiest to administer. Since the plan does not include any employer contributions, the plan is exempt from many of the Code’s nondiscrimination requirements.  Furthermore, the plan generally is exempt from the Title I requirements of ERISA, including reporting and disclosure, because it is not an employer-sponsored plan.

The employer-funded 403(b) plan includes employer contributions and normally also permits salary reduction contributions. The addition of employer contributions subjects the 403(b) plan to many of the nondiscrimination requirements applicable to qualified retirement plans.  Furthermore, unless the employer is a church or a governmental employer, the inclusion of employer contributions subjects the plan to Title I of ERISA.  Consequently, the plan document and plan administration are more complex.

The church plan established as a “retirement income account” is the most unique type of 403(b) plan. A church plan often included employer contributions and employee salary reduction contributions. 

A 403(b) plan may be established any time during the calendar year.
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