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COMPARISON OF CODE §403(b) and CODE §401(k) PLANS
October 2008, Updated May 2010
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| 1. Eligible Employers |
Public schools, public colleges and universities, Indian tribal government schools
and church organizations.
Code §501(c)(3) entity
The employer must be organized and operated exclusively for at least one of the following purposes:
- Religious
- Charitable
- Scientific
- Public Safety Testing
- Animal or Child Abuse Prevention
- Literary
- Education
- Promotion of Amateur Sports (not the sports facility)
Deemed §501(c)(3) Entities
- Cooperative Hospital Services Organization
- These §501(e) organizations perform certain functions on behalf of §501(c)(3) organizations
- Foundations
- Non-profit foundations under§509(a) and private foundations under §4942(j)(3) are eligible. They must satisfy §501(c)(3 before they can satisfy §509(a)or §4942(j)(3).
- Uniformed Services University of Health. P.L. 96-613 gave permission to this organization to have a 403(b) for civilian staff and faculty.
When in doubt – IRS Form 1023: Form 1023 is the Application for Recognition of Exemption under Section 501(c)(3). |
Generally, corporations, partnerships, sole proprietors, tax-exempt employers, private schools, colleges, and universities, and church organizations.
No governmental employers (unless established on or before May 6, 1986).
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2. Eligibility to Defer
Exclusions from participation
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Eligibility:
Immediate
Universal Availability requires all employees of the entity to be eligible to defer. There are a few exceptions:
Final 403(b) Regulations, Exceptions to Universal Availability Rule
- NRA with no US Income
- If Eligible to participate in: another 403(b),
a 401(k), or
a govt.457(b)
- Work Less than 20 hrs.
The above exceptions replace those found in Notice 89-23.
Note: Church plans, by definition, are exempt from the universal availability rules. |
Eligibility:
maximum of 1 year of service and age 21
Exclusions are those permitted in a qualified plan. Specifically:
- NRA with no US income
- Collectively bargained
Classification exclusions, provided 410(b) coverage is passed. |
3. Eligibility to participate
a. Match
b. Discretionary
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a. Employer can define conditions. Maximum is generally age 21/1 year of service.
b. Employer can define conditions. Maximum is generally age 21/1 year of service. |
a. Employer can define conditions. Maximum is generally age 21/1 year of service.
b. Employer can define conditions. Maximum is generally age 21/1 year of service. |
| 4. ERISA Coverage |
501(c)(3) entity can be a non-ERISA Plan if certain conditions are met.
Governmental and Church plans are exempt from being ERISA plans.
A Church may elect to be covered by ERISA. |
ERISA Plan only.
Governmental and Church plans are exempt from being ERISA plans.
A Church may elect to be covered by ERISA. |
| 5. Disclosure |
ERISA Plan: SPD, SAR and Full Form 5500, etc.
Non-ERISA Plan: None |
SPD, SAR and Form 5500, etc. |
| 6. Vesting |
ERISA 403(b) subject to ERISA vesting requirements.
Non-ERISA not subject to ERISA vesting. |
As determined by employer under §411. |
| 7. Joint & Survivor Annuity Requirement |
ERISA Plan: Yes, unless safe harbored.
Non-ERISA Plan: No |
Yes, unless safe harbored. |
8. Funding Vehicles
a. Annuity Contracts
b. Custodial Accounts (Mutual Funds)
c. Other Broad Investment Options |
a. Yes
b. Yes
c. No, unless the plan is sponsored by a church or a convention of churches.
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a. Yes
b. Yes
c. Yes, as governed by the plan document
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9. Participant Directed Investments
a. ER selects options
b. ERISA §404(c) |
a. Yes
b. Yes |
a. Yes
b. Yes |
10. Limitations on Contributions
a. Code §402(g)
b. Code 402(g)(7)
Special Catch-up
c. Code 414(u)
Catch-up
d. Code §415
Annual Additions |
a. $16,500 in 2010.
b. Certain participants with 15 years service may increase limit up to $3,000 per year to maximum lifetime of $15,000.
c. Age 50 and above.
d. 100%/$49,000 in 2010. [100% of includible compensation as defined under §403(b)]. |
a. $16,500 in 2010.
b. Not available
c. Age 50 and above.
d. 100%/$49,000 in 2010. [100% of §415(c) compensation.] |
| 11. Code §415 Aggregation |
Generally, a participant in a Code §403(b) plan need not aggregate contributions made thereunder with contributions to a qualified plan for purposes of the Code §415 limit.
Separate article being written on the exceptions. |
Code §401(k) contributions are always aggregated with contributions to a qualified plan for purposes of the Code §415 limit. |
| 12. Code §404 Limit |
N/A |
25% of compensation in 2009.
N/A to tax-exempt sponsors. |
13. Antidiscrimination
a. Deferrals
b. Matching
c. Discretionary ER
Note: No testing for governmental organization |
a. No testing
b. ACP Test; Safe Harbor
c. Code §§401(a)(4), 401(a)(5), 401(a)(17), 410(b) and 415(c). |
a. ADP Test; Safe Harbor
b. ACP Test; Safe Harbor
c. Code §§401(a)(4), 401(a)(5), 401(a)(17), 410(b) and 415(c). |
14. Pre-Retirement Distributions
a. Hardships
b. Loans
c. In-Service Withdrawals before age 59½ |
a. Yes
b. Yes
c. Yes, for employer contributions in an annuity contract, but not for employer contributions in a custodial account. Deferrals must wait until age 59 1/2. |
a. Yes
b. Yes
c. Yes, for vested employer contributions. Deferrals must wait until age 59 1/2 |
15. Distributable Events
a. Death
b. Disability
c. Age 59½
d. Severance from Employment
e. Termination of Plan |
a. Yes
b. Yes
c. Yes
d. Yes
e. Yes, however issue of having employees withdraw from 403(b) investments
Note: The IRS priority guidance plan includes issuing new guidance on terminating a 403(b) plan. |
a. Yes
b. Yes
c. Yes
d. Yes
e. Yes
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16. Distributions
a. Forms
b. Required Beginning Date
c. Aggregation of RMD |
a. Lump sum, installments and annuities.
b. Generally, the later of age 70½ or the non-5% owner's actual date of retirement. 5% owners by April 1 after the year age 70½ is reached.
However, for Pre-1987 accruals the required beginning date is the later of age 75 or the participant's actual date of retirement. Governmental employees may use the later of age 75 or the participant's actual date of retirement for all benefits.
c. 403(b) RMDs may be aggregated. |
a. Lump sum, installments and annuities.
b. Generally, the later of age 70½ or the non-5% owner's actual date of retirement. 5% owners by April 1 after the year age 70½ is reached.
c. 401(k) RMDs may not be aggregated. |
17. Taxation
a. Mandatory Withholding
b. Early Distribution Tax
c. Conversion to Roth IRA |
a. Yes, for eligible rollover distributions.
b. Yes
c. Yes |
a. Yes, for eligible rollover distributions
b. Yes
c. Yes |
| 18. IRS Qualification |
Prototype Program and LRMs due soon. Program is expected to include a Volume Submitter and a vesting schedule. This will be followed by a Determination Letter program.
(Prior to 2007 regulations, Only through a PLR.) |
Preapproved (M&P and Volume Submitter) and Custom Determination Letter Program. |
| 19. Correction of Defects |
EPCRS, New version of EPCRS due out in 2010 is expected to address 403(b) non-amenders. |
EPCRS |
20. Code §416
Top Heavy Rules
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Top heavy rules do not apply to 403(b) arrangements |
Top heavy rules apply |
