A 403 plan, also known as a tax-sheltered annuity, is a tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

-advantaged retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...

 savings plan available for public education
Public education
State schools, also known in the United States and Canada as public schools,In much of the Commonwealth, including Australia, New Zealand, South Africa, and the United Kingdom, the terms 'public education', 'public school' and 'independent school' are used for private schools, that is, schools...

 organizations, some non-profit
Non-profit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...

 employers (only Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

 501(c)(3) organizations), cooperative hospital service organizations, and self-employed ministers
Minister of religion
In Christian churches, a minister is someone who is authorized by a church or religious organization to perform functions such as teaching of beliefs; leading services such as weddings, baptisms or funerals; or otherwise providing spiritual guidance to the community...

 in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

. It has tax treatment similar to a 401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...

 plan, especially after the Economic Growth and Tax Relief Reconciliation Act of 2001
Economic Growth and Tax Relief Reconciliation Act of 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 , was a sweeping piece of tax legislation in the United States by President George W. Bush...

. 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
Roth IRA
A Roth IRA is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. The tax law of the United States allows a tax reduction on a limited amount of saving for retirement. The Roth IRA is named for its chief legislative sponsor, Senator...

 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
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...

 (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
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

 of the account holder, but this advantage ceased to exist after the October 2007 Bankruptcy Abuse Prevention and Consumer Protection Act
Bankruptcy Abuse Prevention and Consumer Protection Act
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 , is a legislative act that made several significant changes to the United States Bankruptcy Code...

 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 59½ 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
Discrimination testing
Discrimination testing is a technique employed in sensory analysis to determine whether there is a detectable difference among two or more products...


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
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...

 (IRS) Form 5500, including not having the independent auditor requirement applicable to qualified plans with more than 100 plan participants.

Staying Compliant with 403(b) Plans

On December 9, 2008 the IRS gave 403(b) plan sponsors a one-year reprieve for adopting a written plan document. A 403(b) plan, also known as a tax-sheltered annuity plan, is a retirement plan for employees of specific tax-exempt organizations such as health care organizations and colleges and universities. While the relief provisions from the IRS give 403(b) a full year to adopt a written plan document, the plans still must operate in compliance with 403(b) plan requirements. If somebody has taken 403(b) plan and his age is less than 59 1/2 then he can not initiate withdrawal from annuity. If he wants to initiate then he has to show triggering event like i.e. financial hardship, disability, separation from service. The IRS also charges a mandatory 20% as federal taxes on an early withdrawal before it is additionally taxed as ordinary income.

Bankruptcy protection before 2005

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
Bankruptcy in the United States
Bankruptcy in the United States is governed under the United States Constitution which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy...

. 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, IRA
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...

s, and other retirement accounts are, in general, protected from creditors in bankruptcy.

For this reason, having an ERISA anti-alienation clause
Anti-alienation clause
An Anti-alienation clause is a provision in the governing document for an arrangement such as a trust that specifies that the beneficial or equitable owner of the property held in that arrangement cannot transfer the interest to a third party...

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
Spendthrift trust
A spendthrift trust is a trust that is created for the benefit of a person that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary...

. Some critics argued that this is disparate treatment of similar pension schemes and that more consistent protection was called for. The United States Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....

 took this argument to heart in the 2005 bankruptcy reform.

See also

  • List of finance topics
  • 401(k)
    A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...

  • 457(b)
  • 457(f)
  • Individual retirement account
    Individual Retirement Account
    An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...

  • Taxation in the United States
    Taxation in the United States
    The United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...

  • Thrift Savings Plan
    Thrift Savings Plan
    The Thrift Savings Plan is a defined contribution plan for United States civil service employees and retirees as well as for members of the uniformed services....

External links

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.