Quiz 9: Section 403b Plans


Section 403(b) plan of Internal Revenue Code refers to the retirement plan established to provide retirement benefit income to employees working in an educational institution or non profit making company. This retirement plan is adopted by employer so as to provide employees with an opportunity to save for retirement on tax-deferred basis. An employer, who does not want to make elective contribution, can adopt this method. Even if the employer is willing to contribute it can design the plan in such a way so as to make employee contribution not mandatory. Employer can even establish a plan supporting salary deduction arrangement where deduction for employee's contribution is made through salary deduction and such accumulated amount is distributed to employees during retirement as per IRS guidelines. In case of matching contribution by the employer, the plan is similar to other employer's basic retirement plan. The employer's choice of contribution and the level of benefit to be made available to the employee determine the employer's willingness to opt for section 403(b) plan

Section 403(b) of Internal Revenue Code has provided the facility of retirement plan for employees working in educational institutions or non profit organisation so as to provide them with medium to save for their retirement. The 403(b) annuity is referred to as Tax Deferred Annuity (TDA) which is governed by section 501(c)(3) which aims at providing retirement benefit to an employee of non profit organisation designed by the employer, where contribution is made by employee and voluntarily by the employer. The provisions of TDA includes right to employees to remain non forfeitable except in case of non payment of contribution. Further provisions were added by ERISA i.e. section 403(b)(7), as per which investment in stock of regulated investment companies were also allowed along with annuity (mutual fund) contracts. This method includes deduction of salary to transfer to such retirement plan and as such is voluntary in nature. In case of contribution under matching arrangement made by the employer, it can also be referred to as employer's basic retirement plan. Thus, in order to establish a 403(b) retirement plan, following provisions under the law are to be adhered upon.

Section 403(b) of Internal Revenue Code provides with the retirement plans to the employee working with educational institutions and non profit making companies. Until 2001 the maximum exclusive allowance was fixed at $10500, but EGYRRA changed the limit from 2002 to rise every year by $500. Several other provisions were also made for employees attained 50 years of age or above. The addition of this elective deferral limit were applied on most of the programs such as CODA, SIMPLE plans etc. This provision provided an option to employees to treat a part or whole of their elective deferrals to "Roth contribution" for which a 'qualified Roth contribution programme' must be formulated by the employer as a part of the whole programme. Further American Taxpayer Relief Act passed a law in 2013 which allowed taxpayers to transfer their money to post tax savings within Roth contribution account previously which was allowed for excessive amount in defined contribution amount to be transferred. In case of excess distribution, the excess amount is transferred to employer's account and distributed to employee's account in the following year. Thus, the elective deferral limitation has affected plan designs for section 403(b) annuities.

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