More and more employers are realizing that employees are the backbone of their business. And if they want to grow, they must provide benefits that employees want and need.
One of these benefits is a company retirement plan. If that’s why you’re here—congratulations! An employer that cares about the financial well-being of its employees will have a much easier time finding—and retaining—quality employees.
If you’re committed to providing a solid financial future for your employees, you’ll need to first understand how retirement plans work. Today, you’ll learn about the 403(b) Retirement Plan specifically—and why it may be a good fit for your organization.
What Is a 403(B) Retirement Plan and Who Is Eligible?
Are you an employer of a school, university, church, camp, rescue mission, hospital, or a 501(c)(3) charitable organization? If you answered yes, then you may want to consider a 403(b)retirement plan.
403(b) plans are employer-sponsored retirement plans available for employees of tax-exempt organizations, such as—you guessed it—schools, churches, camps, rescue missions, universities, hospitals, or non-profits.
You may be wondering why you should consider a 403(b) plan over a 401(k) plan. Although they are similar in many ways, they have a few differences that you should consider.
Difference Between 403(b) Plans and 401(k) Plans
403(b) Eligibility: A 403(b) is similar to a 401(k) retirement plan, but only offered to employees of tax-exempt organizations while the 401(k) is most frequently offered to for-profit companies.
Employer Match: Both 403(b) and 401(k) plans offer employer matching. The main difference is that if an employer offers a 403(b) plan and does match, they have to comply with ERISA regulations (more on this below). Many employers of 403(b) retirement plans choose not to offer matching contributions because it can be time consuming and costly.
ERISA vs Non-ERISA: While 401(k) plans are subject to ERISA guidelines, 403(b) plans are exempt. But remember, if 403(b) retirement plan employers choose not to follow ERISA regulations, they cannot offer matching contributions. The one exception is if they are a 403(b)(9) church plan. Exempt plans are called Non-ERISA 403(b) plans and involve voluntary participation only.
Investment Options: What about the investment options? 403(b) plans are generally limited to annuities and mutual funds while 401(k) plans offer annuities, mutual funds plus stocks.
Cost: Administrating a 403(b) plan is not as involved as a 401(k) plan and generally costs less to establish and oversee.
403(b) Retirement Plan Options
With a 403(b) plan, you have two options—the main difference being how the plans are taxed.
Traditional 403(b): A traditional 403(b) retirement plan lets you contribute to your retirement plan without being taxed on that money while it grows tax deferred. But you will eventually be taxed on your contributions. This means that you won’t be taxed on that money now, but you will be taxed on it when you take it out in retirement.
Roth 403(b): A Roth 403(b) does the opposite. It allows you to contribute pre-taxed money to your retirement plan while growing tax free. And—the best part—you get to take this money out in retirement tax free! The only exception is if an employer offers matching contributions. In this case, the money the employer contributes grows tax deferred and you will have to pay taxes on the match in retirement.
If you have some wiggle room in your finances, Roth would be your best option. If you don’t, go with Traditional.
403(b) Plan Contribution Limits
Just like a 401(k) plan, 403(b) plans have contribution limits—how much you can put into your retirement each year. For 2021, an employee can contribute up to $19,500. Employees who are 50 or over can make catch-up contributions with a limit of $6,500 (on top of the $19,500 limit) in 2021.
You can keep up with the current contribution limits here.
403(b) Distributions and Early Withdrawal
When you turn 59 ½, you are eligible to take money out of your retirement—otherwise known as distributions. But if you need to withdraw money prior to 59 ½, you’ll be charged a 10% early withdrawal penalty. Avoid this option at all cost!
403(b) Retirement Plan Benefits
Shorter vesting schedules: Vesting simply means how much money an employee owns. With their retirement plan, it’s referring to the money that the employer contributes (if they offer matching).
Rules vary from company to company, but 403(b) plans tend to have shorter vesting schedules—and some are even immediate. This means that even if an employee leaves a job after only working a few months, all the money the employer contributed to the retirement account is fully theirs.
15-year rule: Some 403(b) retirement plans allow employees with 15 (or more) years of service to contribute an extra $3,000 to their retirement plan each year. This is on top of their yearly contribution limit and their catch-up contributions (if they’re 50 years and older). This is a huge benefit for 403(b) plans and something that 401(k) plans do not offer.
The employer’s plan must include this provision, and the employee must have 15 years of service with the same employer. Check with IRS Publication 571 for a more in-depth understanding of the 15-year rule.
Work with People Who Care About Helping You Achieve Your Goals
Now that you’ve got a good understanding of 403(b) retirement plans, it’s time to figure out if they’re right for you, your organization, and your employees.
We’d love to help. At TruthPoint Financial, you will always come first. We provide custom retirement solutions that are built on trust and transparency. This means that we will work with you to create a retirement plan that fits your needs—while always be upfront and honest.
Give us a call today so that we can set up a 403(b) retirement plan for you and your employees.