403(b)

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A 403(b) plan is a U.S. tax-advantaged retirement savings plan available for public education organizations, some non-profit employers (only Internal Revenue Code 501(c)(3) organizations), cooperative hospital service organizations, and self-employed ministers in the United States. It has tax treatment similar to a 401(k) plan, especially after the Economic Growth and Tax Relief Reconciliation Act of 2001.

Employee salary deferrals into a 403(b) plan are made before income tax is paid and allowed to grow tax-deferred until the money is taxed as income when withdrawn from the plan.

403(b) plans are also referred to as a tax-sheltered annuity although since 1974 they no longer are restricted to an annuity form and participants can also invest in mutual funds.[1]

Regulation[edit]

The Employee Retirement Income Security Act (ERISA) does not require 403(b) plans to be technically "qualified" plans, i.e., plans governed by U.S. Tax Code 401(a), but have the same general appearance as qualified plans. While the option is available it is not known how prevalent or if any 403(b) plan has been started or amended to be ERISA-qualified. This is because the main advantage of ERISA plans for participants has been in the event of bankruptcy of the account holder, but this advantage ceased to exist after the October 2007 Bankruptcy Abuse Prevention and Consumer Protection Act extended bankruptcy protection to 403(b) plans. While they are different in some fundamental ways qualified and unqualified plans appear almost the same to the participant and the options available are very similar. The only important differences for the participants are some additional ways that they can withdraw employer money, not salary-deferral money, before the typical 59½ age restriction, but only if the plan is funded with annuities and not mutual funds. The federal government wants to eliminate this difference in proposed regulations expected to be finalized in 2007.

From a plan administration standpoint, 403(b) plans do not have many of the same technical difficulties that 401(k)s do, such as discrimination testing, especially if the plan is not an ERISA plan. If the plan is an ERISA plan (the employer makes contributions to employee accounts) there are additional restrictions and administrative issues applicable to those employer contributions, but not if a plan of a government employer which is not subject to discrimination testing.

Salary-deferral contributions are not subject to complicated discrimination testing. 403(b) plans are instead subject to universal availability which, briefly and in general, means all employees must be permitted to make salary-deferral contributions. 403(b) plans also have simpler and less costly annual reporting requirements on Internal Revenue Service (IRS) Form 5500, including not having the independent auditor requirement applicable to qualified plans with more than 100 plan participants.

Compliance[edit]

On December 9, 2008, the IRS gave 403(b) plan sponsors a one-year reprieve for adopting a written plan document. A 403(b) plan, also known as a tax-sheltered annuity plan, is a retirement plan for employees of specific tax-exempt organizations such as health care organizations and colleges and universities. While the relief provisions from the IRS give 403(b) a full year to adopt a written plan document, the plans still must operate in compliance with 403(b) plan requirements. If somebody has taken 403(b) plan and his age is less than 59½ then he can not initiate withdrawal from annuity. If he wants to initiate then he has to show triggering event such as financial hardship, disability, or separation from service. The IRS also charges a mandatory 10% as federal taxes on an early withdrawal before it is additionally taxed as ordinary income.

Bankruptcy protection before 2005[edit]

Before the passage of the bankruptcy reform act in 2005, a 403(b) that was not an ERISA plan was not accorded protected status as property that could be claimed as exempt by the debtor under the U.S. Bankruptcy Code. In In re Barnes, 264 B.R. 415 (Bankr. E.D. Mich. 2001) Judge Spector held that the fixed-income annuity was not such a trust and could be reached by creditors. The variable account was held to fall within 541(c)(2) and was thus protected. Under the revised bankruptcy laws, 403(b) accounts, IRAs, and other retirement accounts are, in general, protected from creditors in bankruptcy.

For this reason, having an ERISA anti-alienation clause[2] was protective of pensions before the bankruptcy law revisions, giving those pensions the same protection as a spendthrift trust. Some critics argued that this is disparate treatment of similar pension schemes and that more consistent protection was called for. The United States Congress took this argument to heart in the 2005 bankruptcy reform.

After-tax contributions[edit]

Beginning in 2006, 403(b) and 401(k) plans may also include designated Roth IRA contributions, i.e., after-tax contributions, which will allow tax-free withdrawals if certain requirements are met. Primarily, the designated Roth contributions have to be in the plan for at least five taxable years.

See also[edit]

References[edit]

  1. ^ "403bwise". Retrieved 15 March 2013. 
  2. ^ Employee Retirement Income Security Act - ERISA - 29 U.S. Code Chapter 18. findUSlaw. Retrieved on 2013-07-19.

External links[edit]