403(b) Plans

The Internal Revenue Code (IRC) rules require that all employees eligible for a 403(b) Plan be given an opportunity to enroll and/or change contribution levels at least annually. The terms of the Plan specify when employees may enroll. However, a 403(b) Plan is generally required to allow all eligible employees to participate in the 403(b) Plan when their employment begins (the Universal Availability rule).

403(b) Plans may exclude you if you:

• Are a student

• Are a non-resident alien

• Participate in a 401(k), 457(b) or another 403(b) Plan offered by the employer

• Contribute $200 or less per year

• Normally work less than an average of 20 hours per week (1,000 hours per year)

403(b) Plans may receive the following pre-tax and after-tax contributions. The 403(b) Plan annual contribution limit is applied across all 401(a), 401(k), and 403(b) Plans, to which contributions for the employee are made for the plan year.

Employee Pre-Tax Contributions: Amounts deducted from employee wages before tax. These contributions grow tax deferred. At distribution, income tax will be due on the contribution and investment gain.

Roth Contributions: Amounts deducted from employee wages on an after-tax basis. These contributions grow tax free. At distribution, if certain conditions are met, income tax is not due on the contributions or investment gain.

After-Tax Contributions: Amounts deducted from employee wages after tax is paid. These contributions grow tax deferred. At distribution, income tax is due on the investment gain. These contributions are not subject to the annual contribution limits.

Employee contributions each year may not exceed the lesser of:

• The amount annually published by the IRS ($23,000 for 2024, $23,500 for 2025); or

• 100% of your salary

Employers may choose to offer contributions in addition to employee contributions, such as: 

Matching Contributions: Contributions based on a pre-determined formula that matches all or a portion of employee applicable contributions.

Non-Discretionary Contributions: Employer contributions made to eligible employees' account. These contributions can include matching contributions, discretionary contributions, and mandatory contributions as defined in the plan.

The combination of both employer and employee annual contributions may not exceed the lesser of:

• The amount annually published by the IRS ($69,000 for 2024, $70,000 for 2025); or

• 100% of your salary

Catch-up contributions allow you to add funds over the maximum elective deferral limit. To make catch up contributions, employees must meet certain requirements:

Age 50 Catch Up:

If permitted by the Plan, an additional $7,500 per year (for 2024 and 2025) can be contributed to a 403(b) Plan if employees are age 50 and older at any time during the calendar year.

15-Year Rule:

If permitted by the Plan, an additional $3,000 per year can be contributed if employees:

• Have 15 years of service with their current employer

• Contribute less than $5,000 per year on average

• Complete a Maximum Allowable Contribution (MAC) calculation worksheet, which is then approved by the Plan

There is a lifetime maximum catch up of $15,000 under the 15-year rule. If employees are eligible for both the age 50 catch up and the 15-year rule, contributions above the regular limit must be applied first to the 15-year rule.

AFPlanServ will provide forms for each type of distribution allowed under the Plan and will approve transactions across all vendors.

While most Plans allow participants to begin taking distributions when they reach normal retirement age, many Plans allow earlier distributions under certain circumstances. Employers should ensure only permissible distributions are available under their Plan and monitor distributions to make sure procedural requirements and limitations are met across vendors.

Distributions are permitted for:

• Attainment of age 59 1/2 or older*
• Death
• Disability
• Severance from employment
• Qualified Birth or Adoption
• Survivors of Domestic Abuse
• Qualified Reservist
• Domestic relations order
• Plan termination
• Occurrence of qualifying hardship

*Distributions prior to age 59 1/2 may be subject to a 10% penalty tax from the IRS.

403(b) Plans must also meet the required minimum distribution rules, which require distributions after a participant attains age 72 (if not still employed). SECURE 2.0 has updated this age to 73.

If a participant or their beneficiary is faced with a financial hardship, they may qualify for a distribution without tax penalty, if the Plan allows hardships. 

Qualifications:

Immediate and heavy financial need (may include you or your spouse, dependent, or beneficiary):

• Certain medical expenses

• Costs relating to the purchase of a principal residence

• Unpaid college tuition and related educational fees and expenses

• Payments necessary to prevent eviction from, or foreclosure on, a principal residence

• Burial or funeral expenses for immediate family members

• Certain expenses for the repair of damage to the employee's principal residence

Must Show the Hardship Can Not be Relieved by:

• Stopping contributions

• Reimbursement by insurance

• Reasonable liquidation of assets

• Borrowing from commercial resources

Self-Certification Rules:

If your plan allows self-certification for hardship distributions, it’s important to understand the requirements for certification. SECURE 2.0 states a retirement plan sponsor may rely on a participant’s written self-certification for a hardship withdrawal. This means the participant needs to retain records providing proof that they meet the hardship requirements in case the Internal Revenue Service requests it. This may include documents that provide:

• Total cost and details of the event causing hardship. For example: Total cost and type of medical care or education expenses, total cost and details of funeral or burial expenses, details about payment needed to avoid foreclosure or eviction, or total costs and details about a casualty loss sustained.
• Proof that the participant, spouse, dependent, or primary beneficiary under the plan incurred the expense.
• The address of the location and proof that it is the participant’s principal residence.

Specific information for each type of hardship request► 

Participants can only transfer, roll over, or exchange funds if all Plans involved allow these distributions. These may be done without paying income tax or a tax penalty, as long as they follow some simple rules outlined below.

Plan-to-Plan Transfers:

If allowed by both Plans, the participant may move their balance from a former employer’s Plan to their current employer’s Plan. With a plan-to-plan transfer, money is moved directly between Plans and is never distributed to the participant. This helps ensure a non-taxable transaction, but it can only be done if the participant has a qualifying distribution event (such as termination of employment).

Rollovers:

If allowed by both Plans, the participant may roll over funds from a former employer’s retirement account into a new employer’s Plan. Unlike a plan-to-plan transfer, money is distributed to them. The participant then has to deposit the balance into the new Plan within a set period of time to ensure a non-taxable transaction. This transaction also requires that they have a qualifying distribution event (such as termination of employment).

Plan Exchanges:

If allowed by the Plan, the participant may move money between:

• Investment options of the same approved vendor

• Two approved vendors of the Plan

With a plan exchange, money is moved directly between investment options or approved vendors and is never distributed to the participant. This is a non-taxable transaction and does not require a qualifying distribution event.

Participants may take out a loan against their Plan account balance.* 

Maximum Amounts:

Generally, the maximum amount that the Plan will permit as a loan is the lesser of:

• 50% vested balance**,

• $50,000***

Qualified Disaster Recovery Loans:

The loan limit is the lesser of:

• 100% of vested account balance
• $100,000

Repayment:

• Within five years (may be extended by one year for Qualified Disaster Recovery Loan)

• Substantially equal payments

• Quarterly payments, at minimum

• 15 years, if for the purchase of a principal residence

• Provider must be an approved vendor

Other Requirements:

• The employer's plan document must allow for plan loans

• Loan approval and application requirements must be met 

*Individual vendor contracts may or may not allow for this feature.

**If 50% of the vested balance is less than $10,000, you may borrow up to $10,000. Plans are not required to include this exception.

***Reduced by the highest outstanding loan balance of any loan from all Plans held under the employer in the last 12 months.