403(b) Plan
Section 403(b) plans are special retirement plans created by Congress. They may be established only by two general categories of employers: - Public school systems, state colleges and universities, and
- Tax-exempt 501(c)(3) organizations.
Typically, employees of these organizations agree to defer a portion of salary into their individual accounts in the 403(b) plan. Employer contributions are also allowed. Earnings inside the plan accrue on a tax-deferred basis until withdrawn. - The employee of a qualifying organization defers a portion of salary into the 403(b) plan in accordance with a salary reduction agreement with the employer.
- The employee's deferral can be established at any time during the year.
- The salary reduction agreement only applies to future earnings of the employee. If agreement is modified, the modification only applies to subsequent earnings.
Deferrals to a 403(b) plan are still subject to the FICA and Medicare withholding taxes, though exempt from current federal income tax. Employee salary deferrals are subject to an annual maximum on the amount that can be deferred into a 403(b) account, as follows: | Year | Deferral Limit Under Age 50 | Deferral Limit Age 50 and Over | | 2003 | $12,000 | $14,000 | | 2004 | $13,000 | $16,000 | | 2005 | $14,000 | $18,000 | | 2006 | $15,000 | $20,000 |
Withdrawals from a 403(b) account are taxed as ordinary income, except to the extent that they represent a return of the employee's nondeductible contributions. If withdrawals are taken prior to age 59.5, a 10 percent penalty tax will also apply unless the employee: - Has separated (after age 55) from the service of the employer that maintains the 403(b) plan.
- Has died;
- Has become totally disabled.
- Has suffered a financial hardship that cannot be met with other assets (only the employee's salary deferrals may be withdrawn in this case, not earnings), or the withdrawal is rolled over to another plan within 60 days.
- Distributions from a 403(b) plan generally must begin no later than April 1 of the year following the year in which the employee reaches age 70 1/2. However, distributions may be deferred until actual retirement, if later than 70 1/2.
- The special tax treatment available for lump-sum distributions received by certain grandfathered participants in qualified retirement plans is not applicable to 403(b) plans.
- A 403(b) plan may provide life insurance protection to the account owner that is "incidental" to the primary retirement purpose of the plan.
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