- Employee Benefits
- Article
- 6 min. Read
- Last Updated: 02/06/2026
What Is a 403(b) Plan? Retirement Benefits for Nonprofits and Schools
Table of Contents
A 403(b) plan is a tax-advantaged retirement savings plan for employees of public schools, 501(c)(3) tax-exempt organizations, and churches. Also known as a tax-sheltered annuity (TSA), it helps employees save for retirement while reducing current taxable income.
What Is a 403(b) Plan?
A 403(b) plan operates similarly to a 401(k) but exclusively serves public schools, 501(c)(3) tax-exempt organizations, and churches. Employees defer salary into individual retirement accounts, reducing current taxable income while the money grows tax-deferred until retirement. Many plans also offer designated Roth accounts for after-tax contributions with tax-free retirement distributions. The IRS sets annual contribution limits, with additional catch-up contributions available for employees age 50+ and those with 15+ years of service. Plans may also offer loans and hardship withdrawals if you choose to include these features.
How Does a 403(b) Plan Work?
Implementing a 403(b) plan involves several key components that work together to provide retirement benefits for your employees.
Employee Contributions
Employees contribute to their 403(b) accounts through automatic payroll deductions:
- Pre-tax salary deferrals reduce current taxable income
- Sent to investment provider within 15 business days
- Immediate 100% vesting — employees always own their contributions
Employer Contributions
While not required, many employers offer matching contributions to enhance their benefits package:
- Matching contributions enhance competitiveness
- Must follow nondiscrimination rules
- Can establish vesting schedules for employer contributions
Investment Options
403(b) plans offer three types of investment vehicles for employees to choose from:
- Annuity contracts (insurance companies)
- Custodial accounts (mutual funds)
- Retirement income accounts (church employees only)
Vesting Schedules
Vesting rules differ between employee and employer contributions:
- Employee Contributions: Immediate 100% vesting — employees always own their money.
- Employer Contributions: Can establish vesting schedules requiring a service period before full ownership.
- Benefit: Helps with employee retention while managing costs.
403(b) vs 401(k): Understanding the Differences
While 403(b) and 401(k) plans share similarities, key differences affect which plan type your organization can offer and how you must administer it:
| Feature | 403(b) Plan | 401(k) Plan |
|---|---|---|
| Eligible employers | Public schools, 501(c)(3) organizations, churches | For-profit businesses, some nonprofits |
| ERISA requirements | May be exempt (government and certain church plans) | Generally required to comply |
| Investment options | Annuities, mutual funds (custodial accounts), retirement income accounts (churches) | Broader range including stocks, bonds, mutual funds, target-date funds |
| Nondiscrimination testing | Required for employer contributions (non-church, non-governmental plans) | Required for both employee and employer contributions |
| Administrative complexity | Generally, simpler for exempt plans | Typically, more complex compliance requirements |
| Universal availability rule | Must offer to all eligible employees | Can use eligibility requirements (age, service) |
What Employers Should Know About 403(b) Plans
Successfully managing a 403(b) plan requires attention to several administrative and compliance responsibilities.
Eligibility and the Universal Availability Rule
The universal availability rule stands as one of the most important requirements for 403(b) plans. If one employee can defer salary, you must extend this opportunity to all eligible employees.
You can exclude certain categories of workers:
- Employees working <20 hours/week
- Those expected to contribute ≤$200 annually
- Participants in another retirement plan
- Nonresident aliens
- Students in specific service roles
ERISA Compliance Requirements
Whether your plan is subject to ERISA depends on your organization type:
- Government and certain church plans are generally exempt
- Any plans offering employer contributions are not exempt
- ERISA covered plans must meet fiduciary duties, provide summary plan description, and file Form 5500
Required Actions
As a plan sponsor, you must fulfill these ongoing responsibilities:
- Maintain written program document (except exempt plans)
- Conduct annual nondiscrimination testing (non-governmental, non-church plans)
- Select and monitor investment options prudently
- Keep fees reasonable and forward contributions promptly
Common Administrative Challenges
Employers managing 403(b) plans often face these complexities:
- Tracking eligibility across diverse employee populations (especially in educational settings)
- Coordinating with multiple investment providers
- Keeping plan documents updated with changing regulations
- Understanding vendor requirements and contract exchanges
How Paychex Can Help
Paychex simplifies 403(b) administration for tax-exempt organizations and schools with comprehensive retirement services including:
- Compliant plan documents and ongoing administration
- Seamless contribution processing via Paychex Flex®
- ERISA compliance support and participant disclosures
- Regulatory updates and participant education
Talk to a Paychex specialist today to streamline your retirement benefits while managing compliance.
FAQs on 403(b) Plans
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What’s the Difference Between 403(b) and 401(k)?
What’s the Difference Between 403(b) and 401(k)?
The main difference is eligibility: 403(b) plans are exclusively for public schools, 501(c)(3) tax-exempt organizations, and churches, while 401(k) plans are for for-profit businesses. 403(b) plans have more limited investment options (annuities and mutual funds only) but are often simpler to administer, especially for government and church employers who may be exempt from ERISA requirements.
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Can I Have Both a 403(b) and an IRA?
Can I Have Both a 403(b) and an IRA?
Yes, you can contribute to both a 403(b) and an IRA in the same year, as they have separate contribution limits. However, if you participate in a 403(b) plan, your ability to deduct Traditional IRA contributions may be limited based on your income level.
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What Are the 2026 403(b) Contribution Limits?
What Are the 2026 403(b) Contribution Limits?
For 2026, the employee contribution limit increases to $24,500, with an additional $8,000 catch-up contribution for those age 50 or older (or $11,250 for ages 60-63). The total combined employee and employer contribution limit is $72,000 for 2026 (or $80,000 for those age 50 or older making catch-up contributions).
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Which Groups of Employees Typically Use a 403(b)?
Which Groups of Employees Typically Use a 403(b)?
403(b) plans are used by employees of public schools, certain tax-exempt organizations under Section 501(c)(3), and churches. This includes teachers, school administrators, hospital workers, nonprofit employees, and ministers.
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Can You Cash Out a 403(b)?
Can You Cash Out a 403(b)?
Yes, you can take distributions from a 403(b) when you reach age 59½, separate from employment, become disabled, or experience certain qualifying events. However, distributions before age 59½ typically incur a 10% early withdrawal penalty plus ordinary income taxes, unless you qualify for an exception.
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Is 403(b) an IRA?
Is 403(b) an IRA?
No, a 403(b) is not an IRA. A 403(b) is an employer-sponsored retirement plan, while an IRA is an individual retirement account you open independently. They have different contribution limits, eligibility rules, and regulatory requirements.
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What Is the Average Rate of Return for a 403(b) Plan?
What Is the Average Rate of Return for a 403(b) Plan?
The rate of return for a 403(b) plan varies significantly based on the specific investment options chosen, market conditions, and the investment mix between stocks, bonds, and other assets. Returns are not guaranteed and depend entirely on the performance of the annuities or mutual funds selected within the plan, making it impossible to cite a single "average" return that applies across all 403(b) plans.
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