403(b)

A 403(b) plan is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers (only US Tax Code 501(c)(3) organizations), and self-employed ministers in the United States. It has tax treatment similar to a 401(k) plan, especially after the Economic Growth and Tax Relief Reconciliation Act of 2001. Simply put, employee salary deferrals into a 403(b) plan are made before income tax is paid and allowed to grow tax deferred until the money is taxed as income when withdrawn from the plan. Beginning in 2006, 403(b) and 401(k) plans may also include designated Roth contributions, i.e., after-tax contributions, which, if certain requirements are met, will allow tax-free withdrawals. Primarily the designated Roth contributions have to be in the plan for at least five taxable years.

The Employee Retirement Income Security Act (ERISA) does not require 403(b) plans to be technically "qualified" plans, i.e., plans governed by US Tax Code 401(a), but have the same general appearance as qualified plans. While the option is available it is not known how prevalent or if any 403(b) plan has been started or amended to be ERISA-qualified. This is because the main advantage of ERISA plans for participants has been in the event of bankruptcy of the account holder, but that advantage ceased to exist after the October 2005 Bankruptcy Abuse Prevention and Consumer Protection Act extended bankruptcy protection to 403b plans. While they are different in some fundamental ways qualified and unqualified plans appear almost the same to the participant and the options available are very similar. The only important differences for the participant are some additional ways that they can withdraw employer money, not salary-deferral money, before the typical 59 1/2 age restriction, but only if the plan is funded with annuities and not mutual funds. The federal government wants to eliminate this difference in proposed regulations expected to be finalized in 2007.

From a plan administration standpoint, 403(b) plans do not have many of the same technical difficulties that 401(k)s do, such as discrimination testing, especially if the plan is not an ERISA plan. If the plan "is" an ERISA plan (the employer makes contributions to employee accounts) there are additional restrictions and administrative issues applicable to those employer contributions, but not if a plan of a government employer which is not subject to discrimination testing.

Salary-deferral contributions are not subject to complicated discrimination testing. 403(b) plans are instead subject to universal availability which, briefly and in general, means all employees must be permitted to make salary-deferral contributions. 403(b) plans also have simpler and less costly annual reporting requirements on Internal Revenue Service (IRS) Form 5500, including not having the independent auditor requirement applicable to qualified plans with more than 100 plan participants.

ERISA plans have bankruptcy protection

Before the passage of the bankruptcy reform act in 2005, a 403(b) that was not an ERISA plan was not accorded protected status as property that could be claimed as exempt by the debtor under the U.S. Bankruptcy Code. In "In re Barnes", 264 B.R. 415 (Bankr. E.D. Mich. 2001) Judge Spector held that the fixed income annuity was not such a trust and could be reached by creditors. The variable account was held to fall within 541(c)(2) and was thus protected. Under the revised bankruptcy laws, 403(b) accounts, IRAs, and other retirement accounts are, in general, protected from creditors in bankruptcy.

For this reason, having an ERISA anti-alienation clause [http://finduslaw.com/employee_retirement_income_security_act_erisa_29_u_s_code_chapter_18#56] was protective of pensions before the bankruptcy law revisions, giving those pensions the same protection as a spendthrift trust. Some critics argued that this is disparate treatment of similar pension schemes and that more consistent protection was called for. The United States Congress took this argument to heart in the 2005 bankruptcy reform.

ee also

* Employee Retirement Income Security Act
* List of finance topics
* 401(k)
* 457(b)
* 457(f)
* Individual retirement account
* Taxation in the United States
* Thrift Savings Plan
* [http://finduslaw.com/employee_retirement_income_security_act_erisa_29_u_s_code_chapter_18 Text of the Employee Retirement Income Security Act - ERISA - 29 U.S. Code Chapter 18]

External links

* [http://www.irs.gov/pub/irs-pdf/p4406.pdf IRS Publication 4406]
* [http://www.aitraining.com/403regulations.htm New 403b Regulations]