Choosing a Retirement Plan 403(b) for State Workers, Teachers

403(b) Tax-Sheltered Annuity plans are relatively unknown. That’s because only certain employers are allowed to have them. If you are:

• a public school, college, or university,
• a church; or
• a charitable entity tax-exempt under section 501(c)(3) of the Code

then read on. You are allowed to have a 403(b) plan.

Basically, 403(b) plans are similar to 401(k) plans that are maintained by “for-profit” entities. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary. In this case, their deferred money goes to a 403(b) plan sponsored by their employer (that would be you). This deferred money generally does not get taxed by the federal government or by most state governments until distributed. This is just as it is with 401(k) plans. If you establish a 403(b) plan, you can have other retirement plans and you may need to file Form 5500.

Information List:

Pros and Cons:

• Flexibility in contributions.
• Only salary deferral plan available to public school employees.
• Investment options are fewer than under a 401(k) plan.

Who Contributes:  Employee salary deferrals and Employer contributions.

Contribution Limits:
Employee – Lesser of (a) $16,500 in 2010 and 2011 (subject to cost-of-living adjustments in later years), or (b) 100% of includable compensation. If the employee is age 50 or over, a “catch-up” contribution is also allowed. This additional catch-up contribution amount is $5,500 for 2010 and 2011 (subject to cost-of-living adjustments in later years).

Employer/Employee – The lesser of $49,000 in 2010 and 2011 (subject to cost-of-living adjustments in later years) or 100% of includable compensation.  Note: The employee is still limited to the employee elective deferral limit ($16,500 for 2010 and 2011); the employer can add up to another $32,500 (for a total of $49,000 in 2010 and 2011).

Filing Requirements:  Annual filing of Form 5500 may be required.

Participant Loans:  Permitted.

In-Service Withdrawals:  Yes, but subject to possible 10% penalty if under age 59-1/2.

The general steps to establish a 403(b) plan are:

• Adopt a written program
  All 403(b) plans, except church plans that do not contain any retirement income accounts, must have a written program that must contain mandatory provisions and may contain other optional provisions.
  • Sample Plan Provisions – To assist in drafting §403(b) prototype plans
  • Model Plan Language for Public Schools – Provisions that a public school may use to draft a written program that reflects the 403(b) regulation’s requirements or to amend its existing 403(b) plan. Other types of eligible employers may also tailor the model language for their 403(b) plans.
• Establish annuity contracts or custodial accounts for plan participants
  Individual accounts in a 403(b) plan can be any of the following:

1.      An annuity contract, which is a contract provided through an insurance company;

2.      A custodial account, which is an account invested in mutual funds; or

3.      A retirement income account set up for church employees that can be invested in either annuities or mutual funds.

403(b) plans cannot be funded with life insurance (issued after September 24, 2007), endowment, health, accident or other types of insurance contracts.

The employer, who is responsible for ensuring its plan complies with all legal requirements, should verify that there is no conflict between the terms of the 403(b) plan and the provisions of any annuity contract or custodial account agreement under the plan. The plan’s terms will overrule any inconsistencies.

• Obtain an identification number for the plan
  403(b) plans that are subject to ERISA must comply with DOL regulations, which may include obtaining an employee identification number (EIN) for the plan. Governmental, non-electing church and other 403(b) plans that do not meet the safe-harbor requirements under the DOL regulations are not subject to ERISA.
• Provide information to employees and meet other obligations
  403(b) plans that are not exempt from ERISA must also supply information to plan participants, including a Summary Plan Description, and must meet other fiduciary obligations.