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403(b) Plan

What Is a 403(b) Plan?

A 403(b) plan is a retirement plan established by Congress as an investment vehicle for certain public employees, tax-exempt and non-profit organizations established under section 501(c)(3) of the Internal Revenue Code, cooperative hospital service organizations, public school systems organized by Native Indians, and certain ministers.

Individual 403(b) accounts are established and maintained by eligible employees and have some of the same benefits of a 401(k) plan.

Also known as a tax-sheltered annuity plan, the Internal Revenue Service issued a final resolution on how 403(b) plans were to be regulated in July 2007. The final regulations prompted new fiduciary responsibilities and requirements on employers that are to take effect on January 1, 2009, although certain provisions may apply sooner.

In order to qualify for exemption from federal income tax, an organization must be a corporation, community chest, fund, or foundation operated exclusively for one or more purposes that relate to religion, charity, education, science, testing for public safety, fostering national or international amateur sports competition, or the prevention of cruelty directed at children or animals.

To qualify, the organization must be a corporation, community chest, fund or foundation. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify.

What are the different types of individual accounts that can be set up in a 403(b) plan?
  • An annuity contract which is a contract provided through an insurance company.
  • A custodial account that is provided through a retirement account custodian in which investments are limited to regulated investment companies such as mutual funds.
  • a retirement income account that is set up for church employees for which investments options are either annuities or mutual funds.

The employer may determine the financial institution(s) at which individual employees may maintain their 403(b) accounts. Such accounts help employees reduce taxable income through pre-tax contributions, offer tax-deferred earnings on plan contributions, and it allows for loans to be made on the 403(b) account.

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