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March 7, 2009

403(b) Plans: Another Perquisite of Working for Non-Profit Organizations


By Denise Appleby, CISP, CRC, CRPS, CRSP, APA

Private corporations in most cases offer better perquisites than those offered by non-profit organizations. However, one trade off for employees of non-profit organizations is that they usually get to retire earlier on a full pension. Another enviable benefit is the ability to participate in a 403(b) plan. The lower administrative requirements and costs related to 403(b) plans when compared with qualified plans makes them easier and less costly to maintain. This in turn increases the likelihood of employees being offered a retirement plan when they work for an eligible non-profit organization. 

Who is Eligible?

You may participate in a 403(b) plan only if your employer is eligible to offer one and takes the requisite steps to do so. Eligible employers include:

  • tax-exempt organizations established under section 501(c)(3) of the Internal Revenue Code .

  • public school systems.

  • cooperative hospital service organizations.

  • Uniformed Services University of the Health Sciences (USUHS).

  • public school systems organized by Native American tribal governments, and 

  • certain ministers.

If you work for any of the aforementioned organizations and   are unaware of whether they offer a 403(b) plan or not, check with your human resources department.

How Much Can you add to Your 403(b)

Most employers offer a salary-deferral-only 403(b) program; a few also add employer contributions such as matching or discretionary contributions. As a 403(b) participant, you are subject several dollar limitations on contributions, which include:

  • Maximum allowable contribution:  If salary deferral contributions are made to your 403(b) account, you should be aware of and be able to compute your MAC. The IRS MAC worksheet (available in IRS Publication 571 at ) is recommended when trying to determine  the maximum amount that can be contributed to your 403(b) account each year.

  • Annual Additions: Your aggregate salary deferral, after-tax and employer contributions cannot exceed the lesser of the annual addition limit in effect for the year and 100% of your compensation.

  • Your Salary Deferral Limit: Your salary deferral contributions cannot exceed the limit in effect for the year, which is $15,500 for 2008 and $16,500 for 2009. If you are at least age 50 years old by the end of the year, you may also make catch-up contribution amounts. In addition, if you have at least 15-years of service with your employer, you may be eligible to contribute additional salary deferral amounts of up to $3,000. Your employer should be able to determine  your  eligibility for this additional contribution under the 15-year rule.

The limits above are usually monitored by your employer; however, you are responsible for monitoring the following limits:

  • If you  make salary deferral contributions to more than one plan: If you are a participant in more than one 403(b) plan,  or a 403(b) plan and a SIMPLE IRA, 401(k) and a salary-deferral-SEP IRA, your aggregate salary deferral contributions cannot exceed the limit in effect for the year  (explained earlier under Your Salary Deferral Limit). If this limit is exceeded, you are required to notify one of your employers and make arrangements to have the excess amount removed from your account. If you participate in a 457(b) plan, note that contributions to this plan must Not Be taken into account when factoring  your annual salary deferral limits. Contributions to  457(b) plans are not included in this limit.

  • If you participate in more than one plan: Making contributions to more than one employer sponsored 403(b) accounts does not translate to an increase in your contribution limits. If you participate in a 403(b) plan and a qualified plan, SEP IRA or SIMPLE IRA; your aggregate contributions to both plans may also be subject to the annual limit.( see “Salary Deferral Limit” above) In such cases, it may be prudent to work with an ERISA attorney to determine if are subject to one annual addition limit, or if  the annual addition limit can be figured separately for each of the plans. 

Exceeding the contribution limits not only causes administrative problems but can also result in you owing the IRS excise tax on the excess amounts. If you are unsure of the contribution limitations that apply to you, discuss the matter with a financial planner proficient in the rules governing retirement accounts.

How to Participate in a 403(b)

If your employer offers a 403(b) plan, your participation is usually initiated by completing a salary deferral election form.  The form is used to indicate the percentage amount of your salary to be withheld and deposited to your 403(b) account, and in some cases your choice of 403(b) vendor (financial institution).  Your employer may limit your option to one financial institution, or allow you to choose from several. This is unlike a 401(k) plan, where participants are usually required to maintain their account with the one financial institution which is chosen by their employer as custodian of the plan assets.

Automatic Enrollment Allowed

Employers have the option of including an automatic enrollment feature that allows them to automatically set up a salary deferral contribution of 5 % for employees who do not make a salary deferral election; this is also referred to as a negative election.  For employees that are automatically enrolled, the employer usually chooses the financial institution with which the 403(b) account is held. If your employer’s 403(b) plan includes the automatic enrollment feature but you choose not to participate in it and not have any funds withheld from your salary for contributions, you must notify your employer preferably in writing. If on the other hand you are automatically enrolled, be sure to follow-up by completing your beneficiary designation form and make your investment selections. For more on the importance of making your beneficiary designation, see Get Beneficiary Designations in Order.

Your Investment Options

The investment options under a 403(b) are not as varied as those available under other plans, such as  qualified plans,  SEP IRAs or  SIMPLE IRAs. Instead, your investment options depend on the type of 403(b) account to which you contributions are deposited. If your account is held with an annuity company, your contributions are usually invested in an annuity contract.  If your account is held with a brokerage firm, you have the option of choosing to have your contributions invested in one or more of the mutual funds available with the custodian. With a 403(b)(7) custodial account, your contributions are usually deposited  to a money market fund and subsequently re-allocated to the mutual funds of your choice.

Why Participate in a 403(b) Plan

In addition to the opportunity to add significant amounts to your retirement nest egg, your 403(b) account may include other attractive features. These include:

  • Loans: you may be able to borrow (up to) the lesser of 50% of your vested account balance or $50,000.

  • In-service withdrawal: Typically, participants are not permitted to make withdrawals from their 403(b) plan until they experience a triggering event. However, some plans will make an exception to this rule by including an in-service withdrawal feature for rollover contributions made to the plan.

  • Hardship withdrawals: Some plans allow hardship withdrawals, which as the name suggests can be a welcome feature in times of financial hardship

  • Contract exchange: If your employer has more than one approved 403(b) vendor, you may be able to move your investments between those vendors. If you decide to change vendor, be sure to review the features of their accounts, operational procedures, fee structures, available investments and ( if really important to you ) online access to your account details before completing the exchange.

  • Transferability: if you change employers and your new employer offers a 403(b) plan, you can transfer your old 403(b) account to a 403(b) account under your new employer’s 403(b) plan. Before doing so, consider whether it would be more practical to rollover the amount to another type of retirement plan.

  • Rollover-ability: If you experience a triggering event, such as a severance from employment or attainment of retirement age, you can rollover your 403(b) account balance to a traditional IRA, qualified plan, 457(b) plan, SEP IRA or convert it to a Roth IRA providing you satisfy the conversion eligibility requirements.  

Because some of these features are optional, you will need to check with your employer to determine which ones  are available under your plan. In most cases, your account will be established by using the adoption agreement of the financial institution. In the event that the features under the financial institution’s agreement may differ from those that are available under your employer’s plan, your employer’s plan usually overrides the financial institution’s document.


Withdrawal options under your 403(b) account will generally depend on what is permissible under your employer’s plan and the financial institution’s 403(b) document. Distribution options are further determined by the type of 403(b) account, i.e. whether it is a 403(b) annuity or a 403(b)(7) custodial account.

  • 403(b)(7) custodial account: In general, non-salary deferral contributions amounts to a 403(b)(7) custodial account may not be withdrawn before you sever from employment, die, become disabled,  or attain age 59½. Distributions of salary deferral amounts can occur no earlier than when you sever from employment, die, experience a hardship, become disabled or attain age 59½.

  • 403(b) Annuity: Under a 403(b) annuity, distributions are not generally permitted until you sever from employment or the occurrence of certain events such as after a fixed number of years, you attain a stated age, or you become disabled.

To determine the withdrawal rules that apply to your 403(b) account, check the terms of the agreement under which it was established as well as your employer’s 403(b) plan document.


If you would like to participate in a 403(b) plan and work for an eligible employer that does not offer the plan to its employees, check with the human resources department and inquire about getting a  plan started. Having your co-workers sign a petition may also go a far way in helping to convince your employer of the importance of offering the plan.



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