403(b) (US)
A US tax-advantaged retirement savings plan for employees of public schools, tax-exempt nonprofit organizations, and religious institutions, functioning similarly to a 401(k) but with different eligibility rules and investment options.
- What Is a 403(b) Plan?
- Who Can Sponsor a 403(b) Plan?
- 403(b) vs 401(k): Key Differences
- Investment Options in 403(b) Plans
- The 15-Year Service Catch-Up: A Unique 403(b) Feature
- ERISA and Compliance Considerations
- Common 403(b) Plan Issues for HR Teams
- Best Practices for 403(b) Plan Sponsors
- Frequently Asked Questions About 403(b) Plans
What Is a 403(b) Plan?
Key Takeaways
- ✓A 403(b) is a retirement plan for employees of public schools, 501(c)(3) nonprofits, churches, and certain government-affiliated organizations.
- ✓It works very similarly to a 401(k): employees contribute pre-tax or Roth dollars, investments grow tax-deferred, and withdrawals in retirement are taxed (pre-tax) or tax-free (Roth).
- ✓The 2025 contribution limit is $23,500, the same as the 401(k), with the same $7,500 catch-up for those 50+ and $11,250 super catch-up for those 60 to 63.
- ✓A unique feature is the 15-year service catch-up, allowing employees with 15+ years at the same employer to contribute an extra $3,000 per year (up to a $15,000 lifetime max).
- ✓403(b) plans have historically been dominated by annuity products (from TIAA and insurance companies), but mutual fund options have expanded significantly.
A 403(b) plan (sometimes called a tax-sheltered annuity or TSA) is a retirement savings plan designed for a specific group of workers: employees of public schools, tax-exempt 501(c)(3) organizations, churches, and certain hospital systems. It's named after Section 403(b) of the Internal Revenue Code and was created in 1958, two decades before the 401(k) existed. The 403(b) is the retirement plan that teachers, professors, nonprofit workers, nurses at nonprofit hospitals, and church employees typically have access to. About 7 million Americans actively contribute to 403(b) plans, with total plan assets exceeding $1.3 trillion. Functionally, a 403(b) is almost identical to a 401(k). Employees contribute pre-tax or Roth dollars through payroll deductions. Employers may match. Investments grow tax-deferred. Withdrawals in retirement are taxed (for pre-tax contributions) or tax-free (for Roth). The same contribution limits apply. The differences are in who can sponsor the plan, what investments are available, and a few unique catch-up rules. For HR professionals at eligible organizations, understanding these differences matters for plan design, vendor selection, and employee education.
Who Can Sponsor a 403(b) Plan?
Not every employer can offer a 403(b). Eligibility is limited to specific types of organizations.
Eligible employers
Public school systems (K-12 and public universities), including state and local educational institutions. Tax-exempt 501(c)(3) organizations: nonprofits, charitable organizations, research institutions, museums, and similar entities. Churches and church-controlled organizations (which have special exemptions from some ERISA requirements). Cooperative hospital service organizations. Public hospitals may qualify under certain circumstances. The employer's tax status determines 403(b) eligibility. A for-profit company, even if it operates in education or healthcare, can't sponsor a 403(b). It would offer a 401(k) instead.
Employee eligibility within the organization
Almost all employees of an eligible organization must be allowed to participate in the 403(b) plan. The "universal availability" rule requires that if any employee can make elective deferrals, all employees must be given the opportunity. Exceptions are limited: employees who normally work fewer than 20 hours per week, students performing services related to their studies, and employees who are eligible to contribute to a 401(k) or governmental 457(b) at the same employer (to avoid duplicate plan access). This is different from 401(k) plans, where employers can impose eligibility waiting periods of up to 12 months. The universal availability requirement means more employees participate, but it also means employers can't easily restrict access to reduce plan costs.
403(b) vs 401(k): Key Differences
These two plans are often treated as interchangeable, and for most practical purposes, they are. But several important differences affect plan design and administration.
| Feature | 403(b) | 401(k) |
|---|---|---|
| Eligible employers | Public schools, 501(c)(3) nonprofits, churches | Any private sector employer |
| 2025 contribution limit | $23,500 (same) | $23,500 (same) |
| Catch-up contributions (50+) | $7,500 (same) | $7,500 (same) |
| 15-year service catch-up | Yes: extra $3,000/year (up to $15,000 lifetime) | Not available |
| Employer match | Optional (less common than in 401(k) plans) | Optional (more common) |
| Investment options | Annuities and mutual funds (historically annuity-heavy) | Mutual funds (annuities rare) |
| ERISA coverage | Exempt if employer doesn't contribute (church plans always exempt) | Always subject to ERISA |
| Universal availability | Required (almost all employees must be eligible) | Employer can set waiting period up to 12 months |
| Non-discrimination testing | May be exempt (if no employer contributions) | Required for traditional plans |
| Roth option available | Yes | Yes |
| Loan provisions | Yes (if plan allows) | Yes (if plan allows) |
Investment Options in 403(b) Plans
The investment environment of 403(b) plans has a unique history that shapes the options available to participants today.
Annuity contracts
When 403(b) plans were created in 1958, the only permitted investment was annuity contracts, hence the alternate name "tax-sheltered annuity." Insurance companies like TIAA (Teachers Insurance and Annuity Association) became dominant 403(b) providers, offering fixed and variable annuities. TIAA remains the largest 403(b) provider, with over $1 trillion in assets. Annuities provide guaranteed income features that mutual funds don't, but they also come with higher fees and more complex structures. Some 403(b) plans still default to annuity products, and some older contracts have surrender charges that lock in participants for years.
Custodial accounts (mutual funds)
In 1974, Congress expanded 403(b) plans to allow custodial accounts invested in mutual funds. This opened the door for providers like Fidelity, Vanguard, and T. Rowe Price to enter the 403(b) market. Custodial accounts offer the same investment options employees are familiar with in 401(k) plans: index funds, target-date funds, actively managed funds, and bond funds. Fees are generally lower than annuity products, especially when using passive index funds. Many modern 403(b) plans offer a combination of annuity and mutual fund options, giving participants a choice between guaranteed income features and lower-cost market investments.
The fee problem in legacy 403(b) plans
Historically, 403(b) plans have had higher investment fees than 401(k) plans. A 2023 study by Aon found that the average 403(b) plan expense ratio was 0.58%, compared to 0.36% for 401(k) plans. The gap exists because many 403(b) plans still use annuity products with built-in mortality and expense charges, surrender fees, and wrap fees. HR teams at 403(b) organizations should conduct a fee audit every 3 to 5 years and consider consolidating vendors or shifting to lower-cost custodial account options. A 0.22% fee difference may sound small, but on a $500,000 balance, it's $1,100 per year in additional costs.
The 15-Year Service Catch-Up: A Unique 403(b) Feature
The 403(b) plan has a catch-up provision that doesn't exist in any other retirement plan type. Employees with 15 or more years of service at the same 403(b)-eligible employer can contribute an additional $3,000 per year, up to a lifetime maximum of $15,000.
How it works
The 15-year catch-up is separate from the age-50 catch-up. An employee who qualifies for both can use both. For example, a 55-year-old teacher with 20 years of service at the same school district could contribute: $23,500 (regular limit) + $3,000 (15-year catch-up) + $7,500 (age-50 catch-up) = $34,000 in 2025. If the same teacher were aged 60 to 63, the total could reach: $23,500 + $3,000 + $11,250 = $37,750. The 15-year catch-up applies before the age-50 catch-up (IRS ordering rule), which matters when calculating the remaining available catch-up amount.
Eligibility requirements
To qualify, the employee must have at least 15 years of service with the same eligible employer (not aggregate service across multiple employers). The employee's average annual contributions over their career must be less than $5,000 per year. If the employee has consistently maxed out contributions, the 15-year catch-up may not be available because the average annual contribution already exceeds $5,000. The calculation is: (years of service x $5,000) minus total prior contributions = available 15-year catch-up (up to $3,000 per year, $15,000 lifetime). This formula means the catch-up primarily benefits employees who under-contributed in earlier years and want to make up the difference.
ERISA and Compliance Considerations
403(b) plans have a different compliance framework than 401(k) plans, with some significant exemptions that reduce administrative burden.
ERISA exemption for non-contributing employers
If the employer doesn't contribute to the 403(b) plan (no matching, no non-elective contributions), and the plan is funded solely by employee salary deferrals, the plan may be exempt from most ERISA requirements. This means no Form 5500 filing, no annual audit requirement, no summary plan description obligation, and no fiduciary bonding requirement. This exemption is why many small nonprofits can offer 403(b) plans with minimal administrative cost and complexity. The employee makes deferrals through payroll, and the organization's only obligation is universal availability and proper salary reduction agreements.
Church plan exemptions
Church 403(b) plans are exempt from ERISA regardless of whether the employer contributes. This provides churches and church-controlled organizations with significant regulatory flexibility but also reduces participant protections. Church plan participants don't have access to the DOL's complaint process or ERISA's fiduciary standards. HR teams at church organizations should still follow fiduciary best practices voluntarily, even if not legally required. This includes selecting reasonable investment options, monitoring fees, and communicating plan details to employees.
403(b) plan document requirements
Since 2009, all 403(b) plans must have a written plan document (previously, only a salary reduction agreement was required). The plan document must describe eligibility, contribution limits, distribution rules, loan provisions, and hardship withdrawal criteria. This requirement brought 403(b) plans closer to the 401(k) compliance standard. Many smaller nonprofits use pre-approved plan documents from their recordkeeper or TPA to satisfy this requirement.
Common 403(b) Plan Issues for HR Teams
403(b) plans have unique administrative challenges that HR teams at eligible organizations encounter regularly.
Multiple vendor problem
Many 403(b) plans, particularly in school districts, have accumulated dozens of approved investment providers over decades. Some large school districts have 15 to 30 approved vendors, each offering their own products. This creates confusion for employees, makes plan oversight nearly impossible, and often results in participants holding high-fee annuity products chosen through vendor sales presentations rather than fiduciary analysis. The trend is toward consolidation: reducing to 1 to 3 approved vendors with competitively priced options. Consolidation improves oversight, simplifies communication, and usually reduces average fees.
Universal availability compliance
The universal availability rule requires that every eligible employee be notified of their right to participate, at least once per year. Failing to notify all employees (including part-time workers who meet the hours threshold) is a common compliance failure in 403(b) plans. HR teams should document the annual notification, track who received it, and maintain records for at least 3 years. An effective annual notification includes: the opportunity to defer salary into the plan, the available contribution limits, the investment options, and how to enroll.
Coordination with 457(b) plans
Governmental and tax-exempt employers sometimes offer both a 403(b) and a 457(b) plan. These plans have separate contribution limits, meaning an employee can contribute $23,500 to each ($47,000 total in 2025). This is a significant retirement savings advantage not available to 401(k) participants. HR teams should communicate this dual-plan opportunity clearly, as many employees don't realize they can contribute the full limit to both plans. The 457(b) also has no 10% early withdrawal penalty before age 59 and a half (for distributions from governmental plans), making it attractive for employees planning early retirement.
Best Practices for 403(b) Plan Sponsors
Whether you're a school district, university, hospital, or small nonprofit, these practices improve plan outcomes for your employees.
- Consolidate vendors to no more than 2 to 3 approved providers, and ensure at least one offers low-cost index fund options with expense ratios below 0.25%.
- Implement auto-enrollment at 3% to 6% with annual auto-escalation of 1% per year. SECURE 2.0 makes this mandatory for new plans, but existing plans should adopt it voluntarily.
- Communicate the 15-year catch-up provision to long-tenured employees who may not know they can contribute an extra $3,000 per year.
- Conduct a fee benchmarking study every 3 to 5 years. Compare your plan's total cost (investment fees plus administrative fees) against industry benchmarks from sources like the BrightScope/ICI Defined Contribution Plan Profile.
- If you offer both a 403(b) and a 457(b), run joint enrollment campaigns to maximize employee awareness of both plans' separate contribution limits.
- Review and update the plan document annually to reflect legislative changes (SECURE 2.0 provisions are phasing in through 2027).
- Send the universal availability notice annually to all eligible employees, including part-time staff, and retain proof of delivery for compliance records.
Frequently Asked Questions
Can I have both a 403(b) and a 401(k)?
What happens to my 403(b) when I change jobs?
Are 403(b) plan fees really higher than 401(k) fees?
Does my employer have to match in a 403(b)?
Can a nonprofit switch from a 403(b) to a 401(k)?
What is a 403(b)(7) vs a 403(b)(1)?
Written by Adithyan RK