Both 401(k) plans and 403(b) plans are employer-sponsored retirement plans, but there are key differences between the two plans that are important to highlight.
Simply put, a 403(b) plan is a type of retirement plan that originates with and is only allowed to be offered by nonprofits. This includes 501(c)(3) organizations, religious institutions, and government entities such as public schools. Like any other retirement plan, it’s a way for employees to save for retirement in a tax-advantaged way.
In this article, we’ll cover the key attributes of 403(b) retirement plans, including their advantages and disadvantages and how they compare to 401(k) plans.
A 403(b) retirement plan is a type of tax-advantaged retirement savings account available to employees of certain tax-exempt organizations, such as schools, hospitals, and nonprofit organizations. Employees can make contributions from their salary on a pre-tax or Roth (after-tax) basis:
A 403(b) plan works much like a 401(k) plan. Once an employee selects the amount they would like to contribute to their 403(b) account, their employer’s payroll system deducts that percentage or dollar amount from each paycheck during the payroll period.
Additionally, some plans offer an “employer match,” which means the employer will contribute to their employees’ accounts based on how much they contribute, up to certain limits established by the IRS or their plan document. For example, if a plan has a match up to 4% of the employee’s salary and an employee is contributing 3% of their salary, then the employer will also contribute 3%. If the employee is contributing 5%, then the employer will contribute 4%.
Finally, some plans will offer non-elective contributions. These are provided, usually in a pro-rata amount (such as 4% of annual salary, for example) to all employees whether they contribute to the plan or not.
When considering a 403(b) plan, employers should consider the needs of their particular workforce before deciding on a plan. Creating an employee benefits survey can be a good way to determine which type of retirement plan your employee base would prefer.
The deferral limits for a 403(b) plan are typically adjusted for inflation each year. For 2023, an employee can defer up to $22,500 of their pay into a 403(b) or 401(k) plan.
Additionally, if permitted by the 403(b) plan document, employees who are age 50 or over at the end of the calendar year can also make catch-up contributions of $7,500 in 2023 beyond the basic limit on elective deferrals, for a total of $30,000.
A 403(b) plan is a powerful tool for nonprofits to attract and retain talent while giving their employees the ability to save for retirement at tax-advantaged rates. Additionally, they are easier to operate from an administrative perspective relative to a 401(k) plan.
When offering a 403(b) plan, employers should understand their objectives, know the retirement trends within their industry, and invest in employee communication and education to show their employees the benefits of their retirement plan. The good news is, you don’t have to do it alone.
Vestwell is a digital retirement plan platform that makes it easier for you to offer and administer an employer-sponsored 401(k) or 403(b) plan. By combining technology with user-first design and offering 3(16) plan administration services, Vestwell can help you take the hassle out of setting up and administering a 403(b) plan.