403(b) Plans

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403(b) PLAN

A 403(b) is a salary deferral plan that is available only to employees of public education systems and employees of other specific tax-exempt organizations described in Code Sec. 501(c)(3). Examples of these groups are hospitals, charitable, religious, scientific, public safety, and educational organizations that qualify for tax-exempt purposes. As a general rule, state and municipal agencies do not qualify as 501(c)(3) organizations.

There are two basic formats for 403(b) plans; (1) employee contributions only; and, (2) those where the employer also makes a contribution. Generally speaking, 403(b) plans with only employee contributions do not fall under ERISA reporting and disclosure regulations and require no plan administration such as discrimination testing and Series 5500 tax filings. If the plan has both employee and employer contributions it becomes subject to ERISA regulations and requires plan administration similar to a 401(k) plan with a similar cost structure.

The non-ERISA 403(b) plans are typically referred to as voluntary 403(b) “arrangements” because technically speaking, there is no plan. The “plan” is simply the individual 403(b) agreement signed by the employee. There is no plan document signed by the employer. The employer may not impose eligibility requirements, or it becomes an ERISA plan. There is no plan sponsor, as in an ERISA plan. The employer has no control or authority, thus no fiduciary liability, with respect to the individual 403(b) participant. This is the type of arrangement typically found in school systems in which there are many 403(b) vendors available to employees. Since the employer has no responsibility to monitor the vendors the limit is frequently determined by the ability of the payroll system to accommodate them. Some schools may offer as many as 50 vendors.

ERISA 403(b) plans are typically seen in hospitals and other 501(c)(3) organizations that, in the past, were limited to 403(b) as the only type of salary deferral plan to offer their employees. In most cases, these plans also have some type of matching contribution by the employer. With the passage of the Small Job Business Protection Act of 1996 certain tax-exempt organizations are now eligible to offer 401(k) plans and SIMPLE plans. The decision as to which plan is more appropriate is determined on a case-by-case basis. However, if the plan is intended to be strictly salary deferral, a 403(b) is generally more appropriate because there is no ADP testing requirements on 403(b).

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