A 403B plan provides a financial retirement option for public school employees, tax-exempt organization staff and ministers. Each retirement account belongs to the individual employee and falls into one of the three following categories.
- An annuity contract that an insurance company issues.
- A custodial contract that a retirement account custodian issues.
- A retirement income account that invests in annuities or mutual funds.
An employer determines which financial institution that an employee may use to open their 403B retirement plan. The type of financial institution chosen then determines whether the retirement plan will consist of annuities or mutual funds. Employers and employees benefit from 403B retirement plans.
Employers can highlight the opportunity for potential employees to receive a retirement plan during the interview process. An employer that offers retirement account contribution options can be an attractive selling point to a potential employee looking to work for a respectable organization. The 403B retirement plan also allows employers to split the cost of account maintenance with each employee.
Employees receive several benefits from this retirement plan as well. They can make pretax contributions into their accounts which lowers the amount of taxable income they need to claim on personal taxes each year. By establishing the plan before retirement, employees pay less tax on the income balance remaining in the account during their actual years of retirement. Employees may take out personal loans against the account balance if the need arises.
Eligibility Requirements
As with any taxable retirement plan, there are eligibility criteria in place to open a new account. The following employer organizations are eligible to offer 403B retirement plans.
- Tax-exempt 501C organizations
- Public school systems
- Cooperative hospital service organizations
- Uniformed services university of the health sciences
- Public school systems that are part of the Native American tribal government
- Certain ministers of religious organizations
When an employee of one of the above organizations wishes to establish a 403B retirement plan account, he must present a written plan detailing how each responsible party will handle the distribution of the account. It includes the employer that is eligible, the financial institution that holds the funds and any other party that has involvement in distributing the plan to the employee. The written plan must also include what make the employer eligible to offer the plan, and who is responsible for administrative tasks, such as tax filings each year, for the life of the retirement plan.
Plan Coordination
Upon employment, an employer must inform a new employee that an option to establish a 403B retirement plan exists. Further information regarding what financial institutions are acceptable account providers must also be made available. When a financial institution funds an account, they must provide the employee with a 403B (7) Custodial Account Agreement. An annuity company must provide an annuity contract upon opening the account.
An employee then takes the documentation that he receives and provides copies to the employer. Having access to the financial institution holding the funds as well as the account number allows the employer to make contributions to the retirement plan on behalf of the employee. Both parties may also use this information for tax filing purposes each year.
Making Contributions
There are limitations on the types of contributions that a person can make to a 403B retirement account. The account can accept the following contributions.
- Employee paycheck deductions on a pre-tax basis.
- Employer contributions that are fixed or discretionary.
- Employee paycheck deductions on an after-tax basis.
- Roth 403B contributions
- Any combination of the above contribution types.
An employee has the option to defer up to 100 percent of his paycheck amount as a contribution to his 403B account balance. The 2015 limit for this contribution stands at $18,000 per employee. An employee who is at least 50 years old can make catch-up contributions to his account up to $6,000 for the current tax year. A catch-up contribution is an elective contribution in addition to contributions previously made to an account.
Employers may also make contributions to an employee 403B account up to $51,000 or 100 percent of the employee compensation limit, whichever is less. Contribution payments can be automatic deposits or manual deposits made by the employer each payroll payment period. When making automatic deposits, an employer must indicate if there is also a Roth salary deferral as well.
Plan Distributions
Any withdrawal that an employee makes to the retirement plan before the age of 50.5 is subject to a 10 percent early penalty fee. Reasons for early distribution payment include hardships, the end of an employment term and disability. Upon leaving an employer, the employee has the option to roll over the account balance into a new retirement plan. Distribution payments taken at the standard retirement age will not receive a penalty fee.
A 403B retirement plan is an effective way to save funds for retirement. Combining employee contributions and employer contributions paves the way for a healthy financial retirement future. Employees can take comfort in knowing that plans are in place for their golden years.