Financial Answer Center
Who Qualifies for a 403(b) Plan?
Per the guidelines set forth by the Internal Revenue Service, the following professionals are eligible for a 403(b) retirement plan:
• Employees who are eligible under IRS Code Section 501(c)(3) tax-exempt organizations.
• Eligible church employees.
• Eligible employees at cooperative hospital service organizations.
• Ministers who are employed under IRS Code Section 501(c)(3) eligible organizations.
• Ministers (chaplains) who are employed by organizations that are not tax-exempt organizations under Code Section 501(c)(3) and are also functioning as ministers under their professional job duties as outlined by their employers.
• Public school system employees that fall under Indian tribal organizations.
• Eligible employees at public school organizations, which include universities, state colleges, public grade schools, junior high or middle schools, and high schools.
403(b) plans, like 401(k) plans, allow you to make elective pre-tax contributions to the plan and to defer tax on income until retirement. Distributions from a 403(b) plan are taxed as ordinary income.
What makes a 401(k) plan different from a 403(b) plan?
The major differences between a 401(k) plan and a 403(b) plan are as follows:
- 403(b) plans have special increased contribution limits for employees who have completed 15 years of service with certain types of organizations. This feature is not available in a 401(k) plan. Other special contribution limits, not available in 401(k) plans, may be available for church employees.
- Your company's 401(k) plan may offer many different investment options. In contrast, 403(b) plan investments are limited to annuity contracts and mutual funds.
- Your 403(b) plan benefits that accrued prior to 1987 are not subject to the minimum distribution rules, assuming records have been maintained splitting out your pre-1987 benefits.
403(b) Contribution Limits
The IRS places an annual dollar limit on your pre-tax contributions to a 403(b) plan. The limit is indexed for inflation, so that in future years, the dollar limit may be higher. This limit in 2020 is $19,500 ($19,000 in 2019), plus up to $6,500 (up from $6000 in 2019) of catch-up contributions if you are at least age 50. Your employer's 403(b) match limit is up to 25% of your salary per year.
If you are an employee with 15 or more years of service with your current employer and your annual contribution amount doesn’t exceed $5,000 per year, you are eligible to contribute an additional $3,000 per year. There is a lifetime maximum “catch-up” of $15,000. This is where it gets the name “15-year rule.” The idea is to give people who have been slow to ramp up their retirement savings the opportunity to boost their annual contributions when they are able
In addition, if you have completed 15 years of service to qualified institutions and meet other conditions, you are eligible for additional Lifetime Catch-up contributions (contact your benefits administrator for details). All pre-tax contributions made to any 403(b), 401(k), SEP, or SIMPLE plan are counted towards these limits.
Overall Contribution Limits
Under this year’s maximum limits, the total of your elective deferrals and your employer’s matched contributions cannot exceed $57,000. Because they are indexed for inflation, these limits may change annually or periodically in order to remain in line with the economy. This amount for 2020 is up $1,000 from the maximum limit of $56,000 that was applicable since 2019.
If you are eligible to participate in a 403(b) plan, and require more detailed information, contact your benefits department.
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