403(b) Plan

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a type of retirement plan for certain employees of public schools, colleges, and universities; employees of certain tax-exempt organizations, and certain ministers.

Basically, 403(b) plans are similar to 401(k) plans. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary. In this case, their deferred money goes to a 403(b) plan sponsored by the employer. This deferred money generally does not get taxed by the federal government or by most state governments until distributed.

Individual accounts in a 403(b) plan can be any of the following types.

• A custodial account which is an account invested in traditional and non-traditional assets funds,
• An annuity contract, which is a contract provided through an insurance company, or
• A retirement income account set up for church employees.

Advantages of Participating in a 403(b) Plan

There are three primary benefits to contributing to a 403(b) plan.

1. You do not pay income tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Allowable contributions to a 403(b) plan are either excluded or deducted from your income. However, if your contributions are made to a Roth contribution program, this benefit does not apply. Instead, you pay income tax on the contributions to the plan but distributions from the plan (if certain requirements are met) are tax free.

Note: Generally, employees must pay social security and Medicare tax on their contributions to a 403(b) plan, including those made under a salary reduction agreement.

1. The earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them. Earnings and gains on amounts in a Roth contribution program are not taxed if your withdrawals are qualified distributions. Otherwise, they are taxed when you withdraw them.
2. You may be eligible to take a credit for elective deferrals contributed to your 403(b) account.
3. If applicable, the annuity or other assets can be carried with the participant when he/she changes employers or retires.

Who Can Participate in a 403(b) Plan?

Any of the following employees are eligible to participate in a 403(b) plan.

• Employees of tax-exempt organizations established under section 501(c)(3) of the Internal Revenue 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; and
• Certain ministers are eligible as follows:
• Certain ministers (or chaplains) are eligible employees if they are:
• Employed by a section 501(c)(3) organizations;
• Self-employed and are treated as employed by a tax-exempt organization that is a qualified employer; or
• They are employed by organizations that are not section 501(c)(3) organizations however, they function as ministers in their day-to-day professional responsibilities with their employers.

Who Can Set Up a 403(b) Account?

You cannot set up your own 403(b) account. Only employers can set up 403(b) accounts. A self-employed minister cannot set up a 403(b) account for his or her benefit. If you are a self-employed minister, only the organization (denomination) with which you are associated can set up an account for your benefit.

How Can Contributions made to a 403(b) Account?

Generally, only your employer can make contributions to your 403(b) account. However, some plans will allow you to make after-tax contributions.

The following types of contributions can be made to 403(b) accounts.

1. Elective Deferrals. These are contributions made under a salary reduction agreement. This agreement allows your employer to withhold money from your paycheck to be contributed directly into a 403(b) account for your benefit. Except for Roth contributions, you do not pay income tax on these contributions until you withdraw them from the account. If your contributions are Roth contributions, you pay taxes on your contributions but any qualified distributions from your Roth account are tax free.
2. Non-elective Contributions. These are employer contributions that are not made under a salary reduction agreement. Non-elective contributions include matching contributions, discretionary contributions, and mandatory contributions from your employer. You do not pay income tax on these contributions until you withdraw them from the account.
3. After-tax Contributions. These are contributions (that are not Roth contributions) you make with funds that you must include in income on your tax return. A salary payment on which income tax has been withheld is a source of these contributions. If your plan allows you to make after-tax contributions, they are not excluded from income and you cannot deduct them on your tax return.
4. A combination of any of the three contribution types listed above.

Note: If you are a self-employed minister, you are considered both an employee and an employer, and you can contribute to a retirement income account for your own benefit.

Contribution Limits:

There are limits on the amount of contributions that can be made to your 403(b) account each year. If contributions made to your 403(b) account are more than these contribution limits, penalties may apply.

For 2009, if you contribute the maximum basic salary deferral limit, and you qualify for both of the catch-up provisions described below, you have the potential to contribute up to $25,000 to your 403(b):

• 2009 Basic Salary Deferral Limit: $16,500.
• 403(b) Lifetime Catch-up: You may be eligible to defer up to an additional $3,000.
• Age 50+ Catch-up: If you are age 50 or older, you may be eligible to defer up to an additional $5,500 in 2009.
• Total 2009 contribution limit on combined employee/employer contributions is 100% of your includible compensation or $49,000, whichever is less.

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