401(k) and 403(b) Plan Comparison
In the private sector, most employees have access to an employer-sponsored 401(k) plan. In the public non-profit space, including government, hospitals, public schools, and charities, a 403(b) could be the tax-deferred vehicle of choice in lieu of a 401(k).
What the Internal Revenue Code Says about 403(b) Plans
IRC (Internal Revenue Code) Section 403(b) lays out the rules that govern 403(b) Plans. Despite their similarities to a 401(k) Plan, a 403(b) Plan is specific only to select employers.
Eligible employers are a:
- public school, college, or university,
- church; or
- charitable entity tax-exempt under Section 501(c)(3) of the Internal Revenue Code
403(b) and Non-Profits
In this article, we are going to focus on that last employer, the 501(c)(3). Here in the Washington, DC area, we have many wonderful non-profit organizations. Although they vary in mission, many of them fall under IRC 501(c)(3). This unique position allows them to establish a 403(b) Plan. However, being a 501(c)(3) does not preclude establishment of a 401(k) Plan, so these special groups have an option not afforded to those of us in the for-profit space.
In the grand scheme of things, a 403(b) is almost identical to a 401(k), the chart below compares a 401(k) with a 403(b), and is merely a guide. Determining which is right for your organization is a much longer conversation which we are happy to have with you.
401(k) vs 403(b)
|Are written Plan Documents required?||Yes||Yes|
|Can employees contribute pre-tax?||Yes||Yes|
|Are Roth contributions possible?||Yes||Yes|
|Can the Plan Sponsor offer a Match?||Yes||Yes|
|Are participant Loans allowed?||Yes||Yes|
|Does the Plan have ADP/ACP testing?||ADP & ACP – Yes||ADP – No; ACP (for the Match) – Yes|
|Does the Plan have to file Form 5500?||Yes||Yes|
|Can the Plan use a Vesting Schedule?||Yes||Yes|
|Opportunity for robust investment providers?||Yes||More so today, but not as many as a 401(k)*|
*Uniglobal works with dozens of record-keepers, these are the companies that offer the platform for the retirement plan – they are the face of the retirement plan to plan participants. You can see some of the providers we partner with on our home page. Although we do not advise on investments, we can tell you a thing or two about the record-keepers, mainly that, there are more options with a 401(k) than a 403(b) but the gap is closing quickly.
403(b) Plan Limits and Contributions
Under IRC §402(g)(1), a participant in a 403(b) plan may contribute $18,000 pre-tax, or, if Roth deferrals are permitted, $18,000 in Roth – or some combination of the two. If offered, a sponsor of a 403(b) plan may offer a Match on those deferrals or a plan-wide Non-Elective contribution. An extremely generous plan sponsor may have a 403(b) that does both. As we see in the example below.
Mary defers $18,000 from her salary before taxes.
The charity she works for contributes a Match, on her behalf, 100% of her deferrals up to 6% of her gross annual salary into the 403(b) plan. Mary has compensation of $85,000. Her Match could be as high as $5,100 for the 2017 plan and calendar year.
Her employer also has a fixed non-elective formula in the plan which is a guaranteed contribution every year of a flat $10,000.
All combined, Mary could have $33,100 in contributions for 2017, but, if she does not contribute from her salary at all, she only would receive the non-elective of $10,000.
If the plan allows for Roth contributions to be contributed and matched on, all or part of the $18,000 could be designated Roth contributions.
While a 403(b) offers participants a way to control their future and save now for tomorrow in comparison to a 401(k) it’s almost identical.
A Note on Fees
You might be thinking that a 403(b) Plan has lower expenses because it is not subject to as much as a 401(k), this is not necessarily true in every case. Many factors affect pricing. It is prudent to review all services, expenses, offerings, and support afforded, before a sound decision can be made on which retirement plan is best for you and your employees – a 401(k) or a 403(b).
The 403(b) Plan. Much like it’s cousin the 401(k) but truly unique in it’s own regard. CNN Money offers their view on the comparison between a 403(b) and a 401(k).