403(b) plan
Summary definition: A voluntary retirement savings plan for public school, nonprofit, hospital, and tax-exempt organization employees.
What is a 403(b)?
A 403(b) plan is an employer-sponsored retirement savings plan designed for employees of public schools, nonprofit organizations, hospitals, and other tax-exempt entities.
Named after Section 403(b) of the Internal Revenue Code (IRC), a 403(b) works similarly to a 401(k) plan in that employees contribute a portion of their pre-tax salary toward retirement savings, and those contributions grow on a tax-deferred basis.
Also known as a tax-sheltered annuity, 403(b) accounts were originally designed around annuity contracts (i.e., agreements with insurance companies that guarantee a stream of retirement income payments).
Current 403(b) benefits, however, include other investment vehicles (e.g., mutual funds), giving participants greater flexibility in how their savings grow.
Key takeaways
- A 403(b) plan is an employer-sponsored retirement savings plan for employees of public schools, nonprofits, and hospitals.
- Employees can contribute up to $24,500 (in 2026), with additional catch-up contributions becoming available at age 50 and a unique 15-year rule for qualifying long-tenured employees.
- While 403(b) plans share many features with 401(k) and 401(a) plans, key differences include who offers the plan, early withdrawal rules, and whether contributions to multiple plans can be stacked.
403(b) vs. 401(k) vs. 401(a): What's the difference?
403(b) plans function similarly to 401(k) plans, though there are eligibility differences between the two. Moreover, it’s not uncommon for employers offering a 401(a) plan to simultaneously offer a 403(b) plan to provide employees with an additional savings option.
In other words, it’s easy to confuse the three plan types, so understanding the difference between 403(b) and 401(k) plans, and how they relate to 401(a) plans, can be critical for both employers and employees.
| 403(b) | 401(a) | 401(k) | |
|---|---|---|---|
| Typical employer | Nonprofits, public schools, hospitals | Government, public universities, nonprofits | Private sector companies |
| Participation | Voluntary | Mandatory or voluntary | Voluntary |
| Contribution control | Employee-driven | Employer-driven | Employee-driven |
| Contribution structure | Employee chooses amount up to IRS limit | Set by employer (fixed % of salary) | Employee chooses amount up to IRS limit |
| 2026 contribution limit | $24,500 (employee only); $72,000 (combined) | $72,000 (combined) | $24,500 (employee only); $72,000 (combined) |
| 15-year rule catch-up | Yes (qualifying employees only) | No | No |
| Tax treatment | Tax-deferred or Roth | Tax-deferred | Tax-deferred or Roth |
| Investment options | Annuities, mutual funds | Varies by plan | Broader range typically available |
| Common use | Primary or supplemental retirement savings | Primary/mandatory retirement benefit | Primary retirement benefit |
How does a 403(b) work?
A 403(b) retirement plan allows employees to defer a portion of their salary into individual retirement accounts held in their name.
Contributions are typically made pre-tax (i.e., before payroll and income taxes are withheld from gross pay), thus reducing the employee's taxable income for the year. Employers may use a 403(b) match program to also contribute to an employee’s savings, though this varies by organization.
403(b) account investment options typically include annuity contracts issued by insurance companies and mutual funds held in custodial accounts. Employees generally choose how to allocate their contributions across available options based on their risk tolerance and retirement timeline.
Who is eligible for a 403(b) plan?
403(b) rules limit eligibility to employees of certain organizations identified under the IRC, such as:
- Public school systems and educational institutions
- 501(c)(3) tax-exempt nonprofit organizations
- Cooperative hospital service organizations
- Certain ministers and self-employed religious workers
Furthermore, under the IRS’ Universal Availability Rule, if an employer offers a 403(b) retirement option to any eligible employee, it must also offer it to all eligible employees.
There are, however, certain exceptions under which an employer may exclude an otherwise eligible employee, such as working fewer than 20 hours a week.
403(b) 2026 contribution limits
Like a 401(k), the IRS sets annual 403(b) contribution limits. For 2026, 403(b) contributions are capped at $24,500, though employees aged 50 and older are eligible to make additional catch-up contributions up to $8,000 per year, bringing their personal limit to $32,500. Moreover, employees aged 60–63 can make an additional 403(b) contribution of $11,250 annually, for a total limit of $35,750.
Finally, 403(b) plans also have a 15-year rule, which allows long-tenured employees to annually contribute an additional $3,000, up to a lifetime maximum of $15,000, provided they’ve worked for the same employer for at least 15 years and have historically averaged low contributions.
403(b) distribution rules
Employees can take penalty-free distributions from a 403(b) starting at age 59½. An early 403(b) withdrawal before that age typically triggers a 403(b) withdrawal penalty of 10% on top of standard 403(b) taxes, though some exceptions exist:
- Permanent disability or death
- Separation from service after age 55
- Qualified domestic relations orders (QDROs)
- Certain qualified disaster distributions
- Terminal illness diagnosis
- Annual emergency withdrawals of $1,000 due to qualifying financial hardships
Conversely, 403(b) withdrawal rules require participants to begin taking required minimum distributions (RMDs) at age 73, though employees still working may delay their RMD start date until the year they retire, if their plan allows.
Retired participants must take their first RMD by April 1 of the year following the year they turn 73. So, if an employee turned 73 in 2026, they must take their first RMD by April 1, 2027.
Roth 403(b) plans
Many 403(b) plans now offer a 403(b) Roth option, which allows employees to make after-tax contributions to a separate Roth 403(b) account on top of their pre-tax deductions to their standard 403(b) retirement plans, so long as the combined contributions don’t exceed the IRS’ annual limits.
While 403(b) Roth deductions don't reduce an employee’s taxable income right away, qualified withdrawals in retirement are completely tax-free, including any growth the investment accumulated over time.
Pros and cons of 403(b) retirement plans
403(b) plans come with real advantages, but also structural limitations that stem directly from who's allowed to offer them and how they're regulated.
| Pros | Cons |
|---|---|
| Tax-deferred growth on contributions | Investment options limited mainly to annuities and mutual funds |
| 403(b) vs 401(k): 403(b) is often simpler and cheaper to administer | Employers can't offer 403(b) plans unless they're a public school, 501(c)(3), or church |
| Universal availability gives all eligible employees immediate access | Some non-ERISA plans can't offer employer contributions or automatic enrollment |
| Special 15-years-of-service catch-up contribution option | Fewer legal protections for participants in plans exempt from ERISA |
| Exempt from most ERISA reporting and testing requirements if structured as a non-ERISA plan | Historically higher fees than 401(k) plans due to reliance on annuity products |
| Loans and hardship withdrawals are often available, similar to 401(k) plans | Limited employer matching in many plans, since contributions are less common than in 401(k)s |
Employer considerations when offering 403(b) plans
Employers offering a 403(b) plan take on a mix of baseline requirements that apply regardless of plan type, and additional obligations that scale with how much control the employer exercises over the plan:
- Universal availability: If any employee is allowed to make elective deferrals, the employer generally must extend that opportunity to all employees, with limited exceptions for part-time staff working under 20 hours a week, certain students, and nonresident aliens.
- ERISA status: Plans sponsored by public schools and churches are generally exempt from ERISA. Private tax-exempt 501(c)(3) employers can qualify for a non-ERISA safe harbor, but only if their involvement stays limited — no employer contributions, no automatic enrollment, and no discretionary control over plan administration.
- Written plan document: All 403(b) plans must operate under a written plan document to maintain their tax-deferred status.
- Form 5500 and reporting: ERISA-covered 403(b) plans must file an annual Form 5500 and provide participants with a summary plan description; non-ERISA plans are exempt from most of this reporting.
- Nondiscrimination testing: Non-governmental, non-church 403(b) plans generally must complete annual nondiscrimination testing, though salary-deferral-only contributions are typically exempt.
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