A tax sheltered annuity plan (TSA) or 403b plan is a retirement plan available to public school employees, employees of tax exempt organizations, and some ministers. 403b plans get their name from the section of the Internal Revenue Code governing these plans. 403b plan contributions may be funded by employer contributions, salary deferrals, or a combination of both. In many respects, 403b plans are similar to 401k plans commonly available to corporate employees.
403b retirement plan eligibility
403b retirement plans are not available to everyone. An individual employee may not set up a 403b plan; the 403b plan must be set up by the employer. Participation in 403b plans is generally limited to public school employees involved in the day to day operation of schools, employees of tax exempt non-profit organizations, and certain ministers. Ministers are eligible to participate in a 403b plan if (a) they are employees of a tax exempt organization, (b) they are self-employed, or (c) they function as ministers in their day to day responsibilities with their employer.
How are contributions made to a 403b plan?
Generally, employers make contributions to 403b plans on behalf of employees. There are 3 types of 403b plan contributions. Elective deferrals are contributions made under a salary reduction agreement. Employers deduct elective deferrals from employees’ paychecks and contribute the funds to the employees’ 403b plan. Generally, employees are not required to pay income tax on elective deferrals until they withdraw the funds. However, if the elective deferral is a Roth contribution, then the employee must pay income tax on the deferral, although any qualified distribution from the Roth contribution are tax free.
Non-elective contributions are a second type of 403b plan contribution. Non-elective contributions are contributions made directly by the employer. Non-elective contributions are not deducted from the paychecks of employees. Non-elective contributions include matching contributions and profit sharing contributions. Employees are not taxed on non-elective contributions until they withdraw the funds.
After tax contributions are a third type of 403b plan contribution. Some 403b plans allow employees to make elective, after tax contributions to their 403b plan. Employees are required to pay income tax on after tax contributions.
What are 403b plan contribution limits?
The maximum contribution to a 403b plan from all sources during any tax year is the lesser of $49,000 or 100 percent of the employee’s eligible compensation for the year. This overall limit is referred to as the “limit on annual additions” by the IRS. Generally, elective deferrals may make up no more than $16,500 of the limit on annual additions. An exception exists for employees who have at least 15 years experience with the employer who maintains their 403b account. Employees who satisfy the 15 year rule may defer up to a maximum of $19,500 per year. Additionally, employees who are age 50 or over and who have made the maximum elective deferrals for the year can make an additional catch up contribution of up to $5,500. After tax contributions cannot be used to make catch up contributions.
Investment options for 403b plans
403b plans generally offer employees several investment options for their accounts. Most 403b plans offer employees the option of investing in fixed annuities, variable annuities, and mutual funds. Employees should carefully consider their investment opportunities and pick the investment option that best suits their investment goals.