403(b) Plan: What It Means for Employers

What it means in practice

What the term means. Section 403(b)(1)(A) of the Internal Revenue Code excludes from an employee's income contributions to an annuity contract bought for the employee by a 501(c)(3) organization, by a state or local government employer for an employee who performs services for an educational organization, or for certain ministers. The IRS calls it similar to a 401(k) plan maintained by a for-profit entity. Accounts can be an annuity contract from an insurance company, a custodial account invested in mutual funds, or a retirement income account for church employees. The IRS says 403(b) plans cannot be funded with life insurance issued after September 24, 2007, or with endowment, health or accident contracts.

Who can sponsor and participate. The IRS lists eligible employers as public schools, colleges and universities, churches, and charitable entities tax-exempt under section 501(c)(3). Eligible employees include employees of 501(c)(3) organizations, public school employees involved in the day-to-day operations of a school, employees of cooperative hospital service organizations, civilian faculty and staff of the Uniformed Services University of the Health Sciences, and certain ministers. Ministers qualify if employed by a 501(c)(3), if self-employed (only the denomination can set up the account), or if they serve as chaplains for an employer that is not a 501(c)(3), such as a state prison or the Armed Forces (Pub. 571). Except church plans with no retirement income accounts, every 403(b) plan must have a written program.

Universal availability. Under section 403(b)(12)(A)(ii) and 26 CFR 1.403(b)-5(b), if any employee may make elective deferrals, every employee must be allowed to, including the right to designate them as Roth contributions. The plan may require a deferral of more than $200 a year. The only excludable groups are employees eligible to defer under another 403(b), a governmental 457(b) or a 401(k) plan of the employer; certain nonresident aliens; students performing services described in section 3121(b)(10); and employees who normally work fewer than 20 hours a week. That last group means employees reasonably expected to work fewer than 1,000 hours in their first 12 months who then work fewer than 1,000 hours in each later plan year. The IRS stresses that, unlike a 401(a) plan, a 403(b) may not exclude generic classes such as part-time, temporary, seasonal, substitute teachers, adjunct professors or collectively bargained employees, and that once an employee reaches 1,000 hours they cannot be excluded again on that basis. Each eligible employee must have an effective opportunity to make or change an election at least once each plan year. The rule does not apply to churches or qualified church-controlled organizations.

Long-term part-time employees. SECURE 2.0 added ERISA section 202(c). Notice 2024-73 says a 403(b) plan subject to ERISA must let a part-time employee who qualifies as a long-term part-time employee (generally two consecutive 12-month periods of at least 500 hours and age 21) make elective deferrals, for plan years beginning after December 31, 2024. The rule does not reach plans outside ERISA Title I, such as governmental plans.

Testing of employer contributions. Elective deferrals are covered by universal availability instead of an ADP test, but employer contributions, including matches, and after-tax contributions must satisfy sections 401(a)(4), 401(a)(17), 401(m) and 410(b) as if the plan were a qualified plan (26 CFR 1.403(b)-5(a)). Governmental plans are exempt from all but the compensation limit. See non-discrimination testing.

2026 limits. The IRS sets the 2026 deferral limit at $24,500 and the annual additions limit at the lesser of $72,000 or 100% of includible compensation for the employee's most recent year of service. Includible compensation is taxable pay from the employer that maintains the account plus elective deferrals, cafeteria plan and 457 deferrals and pre-tax transportation benefits, but not employer contributions to the 403(b) (Pub. 571). An employee's 403(b) deferrals are combined with deferrals to 401(k), SIMPLE and SARSEP plans, but not with 457 plans, so a worker eligible for a 457(b) plan as well may defer the full limit to each. As of November 4, 2026, the IRS COLA page and newsroom had not announced 2027 limits.

Catch-up contributions. If the plan allows, an employee age 50 or older by year end may defer an extra $8,000 for 2026, or $11,250 for an employee who turns 60 to 63. Beginning in 2026, catch-ups must be Roth contributions for participants whose prior-year wages from the plan sponsor exceeded $150,000 (Notice 2025-67). The 403(b)-only 15-year catch-up is available to an employee with at least 15 years of service with a qualified organization: an educational organization, hospital, health and welfare service agency (including home health), or church-related organization. The limit rises by the least of $3,000; $15,000 minus 15-year catch-ups used in prior years; or $5,000 times years of service minus all prior elective deferrals with that employer. When an employee qualifies for both, amounts above $24,500 count first toward the 15-year catch-up, then the age 50 catch-up.

Automatic enrollment for newer plans. Section 414A generally requires 403(b) plans established on or after December 29, 2022 to automatically enroll employees at an initial default of 3% to 10% of pay, rising one percentage point a year. Governmental and church plans, businesses in existence less than 3 years and employers that normally employ 10 or fewer employees are excepted. As of this review the rules were in proposed form (90 FR 3092), and the IRS 2026-2027 Priority Guidance Plan still lists section 414A guidance.

ERISA or not. ERISA Title I does not apply to governmental plans or to church plans that have not elected coverage (29 U.S.C. 1003(b)). For other sponsors, 29 CFR 2510.3-2(f) says a salary reduction program is not "established or maintained by an employer" if participation is completely voluntary, rights are enforceable solely by the employee, the employer's role is limited to tasks such as allowing vendors to publicize products, collecting and remitting deferrals and limiting vendors to a reasonable choice, and the employer receives only reasonable expense reimbursement. DOL Field Assistance Bulletin 2007-02 describes the safe harbor as covering programs funded solely through salary reduction agreements and says the employer cannot make discretionary determinations, such as approving hardship distributions, loans or QDROs. A 403(b) that is subject to ERISA must give participants a summary plan description, meet fiduciary obligations and file Form 5500.

Payroll and W-2 treatment. Publication 15 (2026) lists employer contributions to 403(b) annuities, including salary reduction contributions, as generally exempt from income tax withholding (subject to section 402(g)), and exempt from Social Security, Medicare and FUTA except that amounts contributed through a salary reduction agreement are taxable. A traditional deferral is therefore a pre-tax deduction for income tax only. The 2026 Form W-2 instructions say to leave elective deferrals out of box 1, include them in box 3 Social Security wages and box 5 Medicare wages, and report them with code E; designated Roth contributions go in boxes 1, 3 and 5 with code BB. Check the box 13 "Retirement plan" box for an active participant.

Deposit timing. 26 CFR 1.403(b)-8(b) requires contributions to reach the annuity issuer or custodian within a period no longer than is reasonable for proper administration; a plan may provide, for example, that deferrals are contributed within 15 business days after the month they would have been paid. For a plan covered by ERISA, the DOL plan asset rule (29 CFR 2510.3-102) treats withheld deferrals as plan assets as soon as they can reasonably be segregated, never later than the 15th business day of the following month, with a safe harbor of 7 business days after the pay date for plans with fewer than 100 participants at the start of the plan year.

Form 5500. The 2025 Form 5500 instructions list 403(b) annuity and custodial account arrangements among the pension plans that must file, and say not to file for arrangements under 29 CFR 2510.3-2(f), governmental plans or non-electing church plans. Large plans filing Schedule H generally must attach an independent qualified public accountant's report. The return is due by the last day of the 7th month after the plan year ends (July 31 for a calendar-year plan), extendable on Form 5558, and the IRS lists a penalty of $250 a day, up to $150,000, for failing to file.

Step by step for an employer. (1) Confirm eligibility to sponsor and keep the written program current. (2) Identify every employee eligible to defer, tracking hours for the 1,000-hour test. (3) Give eligible employees an election opportunity and notice at least annually. (4) Each payroll, subtract pre-tax deferrals from income tax wages only. (5) Track deferrals against $24,500 plus any catch-up. (6) Forward deferrals to vendors promptly. (7) At year end, report codes E and BB and box 13.

Example 1 (illustration): one paycheck. A school employee in a position covered by Social Security is paid $2,500 twice a month and elects $200 pre-tax and $100 Roth each pay. Income tax withholding is figured on $2,300; Social Security and Medicare on $2,500. Over 24 pays with no other deductions, box 1 shows $55,200, boxes 3 and 5 show $60,000, and box 12 shows E 4800.00 and BB 2400.00.

Example 2 (illustration): 15-year catch-up. A 52-year-old hospital employee has 16 years of service and $78,000 of prior deferrals with the hospital, and has never used the 15-year catch-up. The increase is the least of $3,000, $15,000 and $80,000 minus $78,000, so $2,000, making her 2026 limit $26,500. If she defers $30,000, $24,500 is standard, $2,000 is 15-year catch-up and the remaining $3,500 counts toward her $8,000 age 50 catch-up.

Example 3 (illustration): deposit timing. An ERISA-covered 403(b) with 60 participants withholds deferrals from wages paid Friday, November 20, 2026. Skipping weekends and Thanksgiving (Thursday, November 26, a federal holiday per OPM), the 7th business day is Wednesday, December 2. The outer limit, the 15th business day of December, is Monday, December 21.

Where states differ. Two examples. The Pennsylvania Department of Revenue says contributions an employee elects to have made to a 401(k) or 403(b) plan are not excludable from Pennsylvania income. The New Jersey Division of Taxation says the Gross Income Tax Act has no provision deferring tax on employer or employee contributions to a 403(b) plan, so they are taxable when made, including employer contributions made after an employee separates.

Question: Can a for-profit business sponsor a 403(b)? No. The IRS Fix-It Guide says an ineligible organization should stop all contributions and make a submission under the Voluntary Correction Program.

Question: What if an employee defers too much? Pub. 571 says the plan may distribute excess deferrals and earnings no later than April 15 of the following year; the Fix-It Guide says corrections are reported on Form 1099-R.

Question: Who is responsible for the limits, the employer or the vendor? The IRS Fix-It Guide says it is the employer's responsibility to limit deferrals and issue correct W-2s.

This entry summarizes federal rules and two state examples; it does not decide whether a particular plan, employee or payment meets them.

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