What are the differences between a 403(b) and a 401(k)?

403(b) and 401(k) are both employer-sponsored retirement savings plans in the United States, but they are designed for different types of organizations. Here are the key differences between a 403(b) and a 401(k):

1. Eligible Employers:

• 403(b): This plan is typically offered by nonprofit organizations, public schools, and certain tax-exempt organizations. It is also known as a Tax-Sheltered Annuity (TSA) plan.

• 401(k): This plan is offered by for-profit companies, including corporations, partnerships, and sole proprietorships.

2. Employee Eligibility:

• 403(b): Generally, employees of eligible nonprofit and tax-exempt organizations can participate in a 403(b) plan.

• 401(k): Employees of for-profit companies can participate in a 401(k) plan, subject to specific eligibility requirements set by the employer.

3. Contribution Limits:

• 403(b):  the annual contribution limit for a 403(b) plan was $19,500. This limit can be higher for participants age 50 or older who are eligible for catch-up contributions.

• 401(k): The annual contribution limit for a 401(k) plan was also $19,500 in 2022, with the same catch-up contribution option for older participants.

4. Employer Contributions:

• 403(b): Employers can make contributions to a 403(b) plan, but they are more commonly found in 401(k) plans.

• 401(k): Many employers offer matching contributions in 401(k) plans. This means that the employer will match a portion of the employee's contributions, up to a certain limit.

5. Investment Options:

• 403(b): Historically, 403(b) plans primarily offered annuity contracts. However, more modern 403(b) plans now provide a broader range of investment options, including mutual funds.

• 401(k): 401(k) plans offer a wide array of investment options, including mutual funds, exchange-traded funds (ETFs), stocks, and bonds.

6. Vesting Schedules:

• 403(b): Vesting schedules in 403(b) plans can vary by organization. Some may have immediate vesting, while others may have graded or cliff vesting.

• 401(k): Vesting schedules in 401(k) plans can also vary, but employer contributions are often subject to vesting requirements.

7. Loan Provisions:

• 403(b): 403(b) plans may or may not offer loan provisions. If offered, participants can often borrow from their accounts.

• 401(k): 401(k) plans frequently offer loan provisions, allowing participants to borrow a portion of their savings. Loan terms and conditions can vary.

8. Regulatory Oversight:

• 403(b): These plans are regulated by the Employee Retirement Income Security Act (ERISA) but are subject to a different set of rules compared to 401(k) plans.

• 401(k): 401(k) plans are subject to ERISA regulations and have a more extensive regulatory framework.

9. Non-Discrimination Testing:

• 403(b): 403(b) plans are generally not subject to the same non-discrimination testing requirements as 401(k) plans. As a result, they may have fewer administrative requirements.

• 401(k): 401(k) plans are subject to non-discrimination testing to ensure that they do not disproportionately benefit highly compensated employees.

It's important to note that the specific features and rules of 403(b) and 401(k) plans can vary by employer. Participants should consult with their employer's HR department or plan administrator for detailed information about their retirement plan, including contribution limits, investment options, and any specific plan features. Additionally, tax laws and regulations may change over time, so it's advisable to check the latest IRS guidelines for retirement plans.