What does the b stand for in 403b?

If you work for a non-profit organization or other tax-exempt organization, you may not get access to a 401(k) plan that private sector employees have. Instead, your employer may offer a retirement plan known as a 403(b) retirement plan. Here is how 403(b) plans got their name.  

A 403(b) plan is named after section 403(b) of the Internal Revenue Code (IRC). Letter “b” in the name “403(b)” is used to identify clauses in section 403 of the IRC. Other clauses in section 403 include 403(a) and 403(c). When section 403(b) was first added to the IRS code, it only allowed beneficiaries to invest in annuities, but it was later amended to allow individuals to invest in both annuities and mutual funds.

When was 403(b) plan established?

403(b) was established in 1958 when Congress added sections 403(b) to the Internal Revenue Code (IRC) to allow certain section 501(c)(3) organizations to offer 403(b) plans to their employees. Before the enactment of section 403(b) of the IRC, employees of certain tax-exempt organizations were not allowed to save for retirement using a tax-sheltered annuity.

In 1961, section 403(b) was amended to include employees of public education systems like colleges and universities. From 1958 to 1974, retirement savers only had access to annuity products. In 1974, section 403(b) was amended to allow 403(b) retirement plans to offer mutual funds, in addition to annuities. Another amendment in 1981 allowed employees of church organizations to use 403(b) plans to save for retirement.

ERISA 403(b) vs. Non-ERISA 403(b) Plans

Some 403(b) plans are subject to the ERISA Act, while other 403(b) are not required to comply with the ERISA Act standards.

ERISA 403(b) plans are required to comply with the standards of the ERISA act, which protects the covered employee and employer. 403(b) plans sponsored by 501(c)(3) organizations, including charitable organizations and tax-exempt hospitals, are subject to ERISA  standards. 

In comparison, non-ERISA 403(b) plans are exempt from ERISA and may comprise 403(b) plans offered by public education institutions and certain religious organizations. These plans have minimal or no employer involvement and they have voluntary plan participation. Non-ERISA 403(b) plans do not come with the same protection value as ERISA plans, but they are subject to IRS and state laws.

Some non-ERISA plans sponsored by churches and governments may elect ERISA coverage if they need it. They can attach a statement electing that the plan will be subject to the ERISA Act to Form 5500.

Who can participate in 403(b) plans?

403(b) plans are offered to employees of non-profit organizations, religious organizations, hospitals, and other tax-exempt organizations to help them save for retirement. At least 20% of US employees are enrolled in a 403(b) plan, which represents at least one in every five American workers. Similar to a 401(k) plan, a 403(b) plan allows employees to make elective deferrals on a set dollar amount or percentage of salary basis.

Contributions to 403(b) Plans

A 403(b) plan is funded with employee contributions, but some employers may also make matching contributions. Eligible employees are required to sign a salary reduction agreement with the employer, which authorizes the employer to automatically deduct a certain amount from the employee's wages. The contributions are then used to purchase annuity contracts or mutual funds.

If the employer offers a match, you can receive an additional employer contribution to your 403(b) account. The employer may offer a partial or dollar-for-dollar match up to a specific limit. You should contribute enough to your 403(b) plan to collect the full employer’s match.

The contribution limit for 403(b) is $20,500 in 2022. If you are above 50, you can contribute up to $27,000 to the account. In addition, 403(b) plans have a unique advantage over a 401(k) in that they allow a special catch-up contribution if you meet certain requirements. If you have at least 15 years of experience with your employer, you can add an extra $3,000 to your 403(b), with a lifetime limit of $15,000.

If your employer offers a match, the combined contributions cannot exceed $61,000 in 2022, or $67,500 if you are above 50.

What investments are available in a 403(b) plan?

Compared to an IRA and 401(k) plans, 403(b) offers fewer investment options to participants. Generally, participants are limited to mutual funds and annuities, and you do not get direct access to other investment options like stocks, REITs, and ETFs.

A mutual fund is a type of investment product that pools investors' funds and invests in bonds, stocks, or short-term money market instruments. Each investor gets a share of the mutual fund, which represents a portion of the portfolio. Although mutual funds are regulated by the Securities and Exchange Commission, they are not insured by the Federal Deposit Insurance Commission.

On the other hand, annuity contracts are offered by insurance companies, and they guarantee lifetime income from the assets held in the annuity. Once you purchase an annuity, you will receive a single or periodic payment either immediately or when you retire.