403(b) Tax-Sheltered Annuity Plan

A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities. It's similar to a 401(k) plan maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until it's distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently, but is tax-free (including earnings) when distributed.

Eligible employers are a:

  • public school, college, or university,
  • church; or
  • charitable entity tax-exempt under Section 501(c)(3) of the Internal Revenue Code

Pros and Cons:

  • Flexibility in contributions
  • Investment options are limited to those chosen by the employer
  • may have high administrative costs
  • optional loans and hardship distributions add flexibility for employees

Who contributes
Employee salary deferrals; employer may contribute.

Contribution limits
Total contributions to each employee’s 403(b) account or annuity are limited.

Filing requirements
Certain 403(b) plans may be subject to annual Form 5500 filing requirements.

Participant loans
Permitted if the terms of the plan allow loans.

In-service withdrawals
Yes, but subject to possible 10% penalty if under age 59-1/2.

Additional resources


Who Can Participate in a 403(b) Plan?
The following employees are eligible to participate in a 403(b) plan:

  • Employees of tax-exempt organizations established under §501(c)(3) of the Code.
  • Employees of public school systems who are involved in the day-to-day operations of a school.
  • Employees of cooperative hospital service organizations.
  • Civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS).
  • Employees of public school systems organized by Indian tribal governments.
  • Certain ministers if they are:
    • Ministers employed by §501(c)(3) organizations.
    • Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.
    • Ministers (chaplains) who meet both of the following requirements.
      • They are employed by organizations that are not §501(c)(3) organizations.
      • They function as ministers in their day-to-day professional responsibilities with their employers.

Universal availability rule
The "universal availability rule" means that if an employer permits one employee to defer salary into a 403(b) plan, the employer must extend this offer to all employees of the organization.

The employer may exclude certain employees from the plan:

  • Employees who will contribute $200 or less annually
  • Those employees who participate in a 401(k) or 457(b) plan or in another 403(b) plan
  • Employees who normally work less than 20 hours per week
  • Students performing services described in Code §3121(b)(10)

Additional resources


403(b) Contribution Limits
Generally, contributions to an employee’s 403(b) account are limited to the lesser of:

  • the limit on annual additions, or
  • the elective deferral limit

Limit on annual additions
The limit on annual additions (the combination of all employer contributions and employee elective deferrals to all 403(b) accounts) generally is the lesser of:

    • $52,000 for 2014 ($53,000 for 2015), or
    • 100% of includible compensation for the employee's most recent year of service.

Generally, includible compensation is the amount of taxable wages and benefits the employee received in the employee's most recent full year of service. If your 403(b) plan doesn’t limit the total employer and employee contributions to the annual limits, find out how to correct this mistake.

Limit on elective deferrals
The limit on elective deferrals - the most an employee can contribute to a 403(b) account by means of a salary reduction agreement - is $17,500 in 2013 and 2014.

Catch-ups for employees with 15-years of service
If permitted by the 403(b) plan, an employee who has at least 15 years of service with a public school system, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches (or associated organization), has a 403(b) elective deferral limit that is increased by the lesser of:

    1. $3,000,
    2. $15,000, reduced by the amount of additional elective deferrals made in prior years because of this rule, or
    3. $5,000 times the number of the employee’s years of service for the organization, minus the total elective deferrals made for earlier years.

An employee who qualifies for the 15-year rule can have an elective deferral limit as high as $20,500 for 2014. For plans that offer “15-years of service catch-up” contributions, if an employee making these contributions doesn’t have the required 15 years of full-time service with the same employer, find out how to correct this mistake.

Catch-ups for employees age 50 or over
If permitted by the 403(b) plan, employees who are age 50 or over at the end of the calendar year can also make catch-up contributions of $5,500 in 2014 and $6,000 in 2015 beyond the basic limit on elective deferrals. If the 403(b) plan doesn’t have the age 50 catch-up and an employee made deferrals over the 402(g) limit (or the 402(g) limit  adjusted for a 15-year catch-up), find out how to correct this mistake.

If both catch-up provisions apply
While the age 50 catch-up is subject to an annual limit, the 15-year catch-up is subject to a use test, lifetime limit and an annual limit. When both catch-up opportunities are available, the law requires deferrals exceeding the standard limit ($17,500 in 2014 and $18,000 in 2015) to be first applied to the 15-year catch-up (to the extent permitted), and then to the age 50 catch-up.

Example: Assume Pat, age 50, has worked as a teacher in the XYZ School District for 15 years; is eligible for the 15 years of service catch-up; and has eligible compensation of $70,000 for 2014. The maximum employee and employer contributions to the XYZ 403(b) plan for 2014 for Pat would be $57,500:

    • Pat may have elective deferrals to the 403(b) plan totaling $20,500 ($17,500 plus $3,000 15 years of service catch-up)
    • Employer contribution of $31,500, bringing the total employee and employer contributions to $52,000, the annual additions limit.
    • Pat may also defer an additional $5,500 age 50 catch-up contribution in 2014.

Example: Now assume that Pat only deferred $22,000 of his salary under the 403(b) plan. The plan provides both the 15-year and age 50 catch-up deferral opportunities. Under the use test, Pat is eligible for a 15-year catch-up of $3,000. Of the total $22,000 deferred for 2014, the maximum standard deferral of $17,500 is first applied, followed by application of the 15-year catch-up deferral of $3,000, and finally application of the remaining $1,500 to the age 50 catch-up deferral.

Employees who also participate in another plan
Employees must combine contributions made to their 403(b) accounts with contributions made to all other plans in which they participate (other than 457 plans): 401(k)s and other qualified plans, and SIMPLE IRAs. The employee's total elective deferrals to all of these plans combined cannot exceed the annual deferral limit ($17,500 in 2014 and $18,000 in 2015). See How Much Salary Can You Defer if You're Eligible for More Than One Retirement Plan.

Additional resources

  • 403(b) plans home page
  • Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations