403-b

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History of the 403(b) Plan
  • 403(b) programs were originally created in 1958 by Congress for employees of tax-exempt corporations.
  • In 1961, public education institutions, including public school districts, became eligible to offer 403(b) plans.
  • In 1973, Congress passed a law allowing employees to make tax-free exchanges of the full account value from one 403(b) plan to another, and partial transfers have been allowed since 1992.
  • In 1974, Congress passed the Employee Retirement Income Security Act (ERISA), which included a provision allowing 403(b) plans to increase the number of their investment options and offer mutual funds in addition to annuities.
  • In 1978, a law was passed allowing employees to roll 403(b) assets into a traditional IRA.
  • Starting in 1982, with the passage of the Tax Equity and Fiscal Responsibility Act, 403(b) participants were allowed to take loans from their plans. Additionally, religious organizations were permitted to set up Retirement Income Accounts, a specialized form of 403(b) plan.
  • In 1986, another tax law imposed restrictions on withdrawals before age 59½ and made them subject to a 10 percent early withdrawal penalty. Additionally, required minimum distributions (after age 70½) were established along with new limits on elective deferrals. The limit established then, $9,500 per person per year, remained in effect until 1998.
  • A 1992 IRS ruling allowed employees to make tax-free full or partial account transfers from annuities to 403(b)(7) mutual fund accounts.
  • The 2001 tax bill, which took effect in 2002, allowed 403(b) participants to roll their money into a 401(k) or governmental 457 plan when changing jobs, in addition to an IRA or other 403(b). Similarly, employees with savings in 401(k) or governmental 457 plans may roll their contributions into a 403(b) plan, if offered by their new employer. The tax bill also simplified the formula used to calculate an employee's annual contribution limit.
  • On July 23, 2007, the IRS finalized new regulations (set to go into full effect January 1, 2009) for public 403(b) retirement plans. The main highlights include:
    • Requirement that a 403(b) program be maintained pursuant to a written plan which satisfies section 403(b) in both form and operation and contains all the terms and conditions for eligibility, limitations, and benefits under the plan.
    • End to traditional 90-24 outside-of-plan transfers.
    • Requirement to provide annual notification of eligibility
    • Clarification of universal availability
    • New information sharing requirements between employers and vendors.
Sources:

The 403(b) is a tax deferred, defined contribution plan available to employees of educational institutions such as public school districts and certain (Internal Revenue Code section) 501(c)(3) non-profit groups, which include colleges, universities, hospitals, charities and the clergy.[1]

The 403(b) has a long history (see the accompanying sidebar) and a long association with the insurance industry. The following table provides a summary of 2008 year end 403(b) assets as well as the distribution of assets across annuity and mutual fund investment platforms.

403(b) Plan Net Assets (12-31-2008) in billions
2008 Fixed Annuity Variable Annuity Mutual Funds Total Assets
Net Assets328174110612
Percentage54%28%18%100%

Source:Spectrem Groug (via 403b. wise) For historical data:403b.wise from Spectrum Group

Contents

Summary

Contributions to a 403(b) plan are tax-deductible, and any earnings accumulate tax-free until withdrawals are made. Withdrawals are taxed at ordinary income rates, and a 10% penalty tax is assessed on withdrawals made prior to the age of 59 ½ , unless one meets one of the following exclusions:

  • Attain age 59-1/2
  • Separate from service in or after the year in which you reach age 55
  • Part of a series of substantially equal periodic payments for your life or the joint lives of you and your designated beneficiary
  • Hardship
  • Disability
  • Death
  • Made due to an IRS levy upon your participant account
  • Paid to an alternative payee under a qualified domestic relations order
  • Is a qualified reservist distribution as defined under the Pension Protection Act of 2006
  • Is a payment of qualified medical expenses greater than 7.2% of your adjusted gross income.[2]


Contributions

Employees may contribute up to 100% of their salaries, subject to the following limits:

Contribution Limits
Year Under Age 50 Age 50 or Older
2007$15,000 $20,500
2008$15,500 $20,500
2009$16,500 $22,000

Employees with 15 or more years of service with public school systems, hospitals, home health service agencies. health and welfare agencies, churches, or convention or associations of churches may be able to defer an extra $3,000 in catch-up contributions (to a lifetime maximum of $15,000).[3]

Distributions

MRD Suspended for 2009
"If you're over age 70½, you won't have to take required minimum distributions (RMDs) in 2009 from your tax-deferred retirement accounts under new legislation signed by President Bush.
The 2009 RMD suspension applies to traditional IRAs, 401(k)s, 403(b)s, and other defined contribution plans. The suspension also applies to investors under age 70½ with inherited IRAs or inherited retirement plan accounts that would otherwise be subject to RMDs."--Vanguard News release, December 23, 2008

Advantages

Criticisms

See Also

Links

W. Scott Simon, who writes a monthly Fiduciary Focus column for Morningstar has an eight part series on the 403-b Plan universe. These plans have been affected by recent regulation changes. This series is especially valuable for 403-b plan providers.

Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 1) Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 2) Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 3) Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 4) Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 5) Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 6) Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 7) Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 8)"

References

  1. ↑ IRS Publication 571 Tax-Sheltered Annuity Plans(403(b)Plans)
  2. ↑ 403bwise FAQ
  3. ↑ Vanguard 403-b: Who can contribute

How to Cite

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Retirement Accounts
Individual Roth IRA • Traditional IRA • Non-deductible Traditional IRA
Employer Sponsored Plans Overview • 401(k) • Solo 401(k) • 403(b) • 457(b) • SEP IRA • SIMPLE IRA • Thrift Savings Plan
Managing Employer Sponsored Plans How to Campaign for a Better 401(k) Plan
Split Interest Gifts Charitable Lead Trust • Charitable Pooled Income Fund • Charitable Remainder Trust • Gift Annuity
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