403(b)

In the

ministers in the United States.^[1] It has tax treatment similar to a 401(k) plan, especially after the Economic Growth and Tax Relief Reconciliation Act of 2001.^[2] Both plans also require that distributions start at age 72 (according to the rules updated in 2020), known as Required Minimum Distributions (RMDs).^[3]

Distributions are typically taxed as ordinary income.

Employee salary deferrals into a 403(b) plan are made before income tax is paid and allowed to grow tax-deferred until the money is taxed as income when withdrawn from the plan.

403(b) plans are also referred to as a tax-sheltered annuity (TSA) although since 1974 they no longer are restricted to an annuity form and participants can also invest in mutual funds.^[4]

Regulation

The

annuities and not mutual funds. The federal government wants to eliminate this difference in proposed regulations expected to be finalized in 2007.^{[needs update}

]

From a plan administration standpoint, 403(b) plans do not have many of the same technical difficulties that 401(k) plans do, such as discrimination testing, especially if the plan is not an ERISA plan. If the plan is an ERISA plan (the employer makes contributions to employee accounts) there are additional restrictions and administrative issues applicable to those employer contributions, but not if a plan of a government employer which is not subject to discrimination testing.

Salary-deferral contributions are not subject to complicated discrimination testing. 403(b) plans are instead subject to universal availability which, briefly and in general, means all employees must be permitted to make salary-deferral contributions. 403(b) plans also have simpler and less costly annual reporting requirements on Internal Revenue Service (IRS) Form 5500, including not having the independent auditor requirement applicable to qualified plans with more than 100 plan participants.^[5]

Compliance

On December 9, 2008, the IRS gave 403(b) plan sponsors a one-year reprieve for adopting a written plan document. While the relief provisions from the IRS give 403(b) sponsors a full year to adopt a written plan document, the plans still must operate in compliance with 403(b) plan requirements. If a person has taken a 403(b) plan and their age is less than 59½, then they cannot initiate an early withdrawal unless they can demonstrate a triggering event such as financial hardship, disability, or separation from service. In this event, the IRS will also charge a mandatory 10% in federal taxes, and it is additionally taxed as ordinary income.^[5]

Bankruptcy protection before 2005

Before the passage of the bankruptcy reform act in 2005, a 403(b) that was not an ERISA plan was not accorded protected status as property that could be claimed as exempt by the debtor under the

IRAs, and other retirement accounts are, in general, protected from creditors

in bankruptcy.

For this reason, having an ERISA anti-alienation clause^[5] was protective of pensions before the bankruptcy law revisions, giving those pensions the same protection as a spendthrift trust. Some critics argued that this is disparate treatment of similar pension schemes and that more consistent protection was called for. The United States Congress took this argument to heart in the 2005 bankruptcy reform.

After-tax contributions

Beginning in 2006, 403(b) and 401(k) plans may also include designated Roth contributions, i.e., after-tax contributions, which will allow tax-free withdrawals if certain requirements are met. Primarily, the designated Roth contributions have to be in the plan for at least five taxable years and you have to be at least 59 years of age.

Church plans

A church plan is a retirement plan established and maintained by a tax-exempt church, a convention of churches, or an association of churches for its employees.^[7]^[8] Church plans are not subject to the Employee Retirement Income Security Act of 1974 (ERISA) unless it voluntarily makes an irrevocable election to be subject to ERISA.^[9]^[10]

A church plan may be a

defined contribution plan, or a deferred compensation plan.^[11]

A church plan that is not subject to ERISA is not required to file an IRS Form 5500, nor is it required to distribute summary annual reports, summary plan descriptions, or summaries of material modifications to plan participants.[11] Church plans are generally subject to state law though. A defined benefit church plan is not required to pay subject to Pension Benefit Guaranty Corporation plan termination insurance.^[11]

References

^ "403(b) Plan Basics". irs.gov. Internal Revenue Service. Retrieved 2016-09-02.
^ "How is a 403(b) different from a 401(k)?". cnn.com. Retrieved 2016-09-02.
^ "401(k) and 403(b) Plans: What's the Difference?". Investopedia. Retrieved 2023-05-18.
^ "The 403(b) Basics". 403bwise.com. Retrieved 2016-09-02.
^ ^a ^b ^c Employee Retirement Income Security Act - ERISA - 29 U.S. Code Chapter 18. findUSlaw. Retrieved on 2016-09-02.
^ "In re Estate of Barnes (Majority)". law.justia.com. Retrieved 2016-09-02.
^ 29 U.S.C. § 1002(33)(A).
^ 26 U.S.C. § 414(e)(1).
^ 29 U.S.C. § 1003(b)(2).
^ C.F.R. § 1.410(d)-1.
^ ^a ^b ^c Sciscoe, Tara Schulstad (2017). "Church Retirement Plans". Ice Miller LLP.

External links

[1] "403(b) Plan Basics". irs.gov. Internal Revenue Service. Retrieved 2016-09-02.

[2] "How is a 403(b) different from a 401(k)?". cnn.com. Retrieved 2016-09-02.

[3] "401(k) and 403(b) Plans: What's the Difference?". Investopedia. Retrieved 2023-05-18.

[4] "The 403(b) Basics". 403bwise.com. Retrieved 2016-09-02.

[:0-5] Employee Retirement Income Security Act - ERISA - 29 U.S. Code Chapter 18. findUSlaw. Retrieved on 2016-09-02.

[6] "In re Estate of Barnes (Majority)". law.justia.com. Retrieved 2016-09-02.

[7] 29 U.S.C. § 1002(33)(A).

[8] 26 U.S.C. § 414(e)(1).

[9] 29 U.S.C. § 1003(b)(2).

[10] C.F.R. § 1.410(d)-1.

[Sciscoe-11] Sciscoe, Tara Schulstad (2017). "Church Retirement Plans". Ice Miller LLP.

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