403(b) Retirement Plans — Tax-Sheltered Annuities for Nonprofits and Public Schools
If you work for a hospital, a university, a K–12 public school district, a nonprofit organization, or a church, you probably have access to a 403(b) plan — the nonprofit and public-sector counterpart to the private-sector 401(k). Named for the section of the tax code that authorizes it, a 403(b) allows employees of qualifying employers to defer a portion of their salary into a tax-advantaged retirement account, where it grows tax-deferred until withdrawal. The contribution limits are identical to those for 401(k) plans ($24,500 in 2026, with an additional $8,000 catch-up for those 50 and older), and SECURE 2.0 extended the same automatic enrollment and Roth contribution rules to 403(b) plans that previously applied only to 401(k)s. There is one distinctive feature that 403(b) has over 401(k): employees with 15 or more years of service at a qualifying employer can access an extra $3,000/year catch-up contribution (up to $15,000 lifetime) that does not exist in any other retirement plan structure.
Current Law (2026)
| Parameter | Value |
|---|---|
| Core statute | 26 U.S.C. § 403(b) |
| Eligible employers | § 501(c)(3) nonprofits, public educational organizations (state/local governments for school districts), ministers |
| Employee elective deferrals | $24,500 (2026, same as 401(k)) |
| Age 50+ catch-up | $8,000 (2026) — total $32,500 if age 50+ |
| 15-year catch-up | Additional $3,000/year (max $15,000 lifetime) for employees with 15+ years of service at a hospital, school system, home health service agency, health/welfare service agency, or church — computed on an average unused deferral basis |
| § 415 combined limit | $72,000 in 2026 — maximum annual additions (employee + employer contributions) |
| Investment vehicles | Annuity contracts (from insurance companies) OR § 403(b)(7) mutual fund custodial accounts — NOT individual stocks or ETFs directly |
| ERISA coverage | § 501(c)(3) plans generally ARE subject to ERISA; governmental plans and church plans are ERISA-exempt |
| Hardship withdrawals | Available for salary deferrals on account of immediate and heavy financial need (same criteria as 401(k) hardship) |
| In-service withdrawals | Age 59½; salary deferrals additionally restricted to separation from service, death, disability, or hardship |
| RMD rules | Required minimum distributions begin at age 73 (SECURE 2.0); same rules as 401(k) |
| Rollover | Can roll to IRA, 401(k), other 403(b), or governmental 457(b) |
| Auto-enrollment | SECURE 2.0 requires automatic enrollment at 3% for new 403(b) plans starting in 2025 (with annual escalation to 10%, 15% cap) |
Legal Authority
- 26 U.S.C. § 403(b)(1) — The core exclusion: if an annuity contract is purchased for an employee by a § 501(c)(3) employer or a public educational institution, the employee's rights are nonforfeitable, and the plan meets nondiscrimination requirements, amounts deferred are excluded from gross income in the year earned and taxed only upon distribution
- 26 U.S.C. § 403(b)(7) — Custodial accounts: amounts paid to a custodial account holding regulated investment company stock (mutual funds) are treated as annuity contract contributions, allowing 403(b) plans to offer mutual fund investments alongside annuity products
- 26 U.S.C. § 403(b)(9) — Retirement income accounts: church and church-affiliated organizations can establish defined contribution programs under § 403(b) that qualify as "retirement income accounts," often with simplified administration compared to ERISA-covered plans
- 26 U.S.C. § 403(b)(11) — Distribution restrictions for salary deferrals: salary reduction contributions may only be distributed upon age 59½, severance from employment, death, disability, or hardship — the same restrictions that apply to 401(k) plans
- 26 U.S.C. § 402(g) — Annual elective deferral limit applies to 403(b) plans the same as 401(k)s; the limit applies on a combined basis if a participant contributes to both types in the same year
- 26 U.S.C. § 414(v) — Age 50+ catch-up contributions allowed for 403(b) plans on the same terms as 401(k) plans
How 403(b) Plans Work
Who sponsors them: Your employer must be a § 501(c)(3) tax-exempt nonprofit (hospitals, private colleges, social service agencies, research institutions), a public educational institution operated by a state or local government (public school districts, state universities, community colleges), or a church or church-affiliated organization. The vast majority of healthcare and higher education workers have access to 403(b) plans — the same teachers, nurses, and hospital administrators who, in many cases, also have access to a pension plan or a governmental 457(b) alongside the 403(b).
Investment options — the annuity legacy: 403(b) plans were originally called "Tax-Sheltered Annuities" (TSAs) because the only permitted investment was an annuity contract purchased from an insurance company. The statute was amended in 1974 (and again over time) to allow mutual fund custodial accounts (§ 403(b)(7)), so most modern 403(b) plans offer a mix of annuity products and low-cost mutual funds. However, unlike 401(k) plans, 403(b)s cannot hold individual stocks, ETFs (held directly), or self-directed brokerage accounts within the plan. Some plans offer an annuity "wrapper" around mutual funds, which can add layers of fees — one of the persistent criticisms of 403(b) plans in the education sector, where fixed annuity products with high surrender charges and subaccounts with elevated expense ratios have been marketed aggressively to teachers.
The 15-year catch-up — a 403(b) exclusive: Section 402(g)(7) (cross-referenced in § 403(b)) allows employees with 15 or more years of service at a qualifying organization (hospitals, school systems, home health service agencies, health and welfare agencies, churches) to contribute an additional $3,000 per year beyond the standard limit, up to a $15,000 lifetime maximum. The calculation is complex: the extra amount is limited to the lesser of (i) $3,000, (ii) $15,000 minus prior 15-year catch-up contributions, or (iii) $5,000 × years of service minus total deferrals in prior years. In practice, this catch-up phases out for employees who have consistently maxed out their 403(b) contributions. Teachers and nurses who under-deferred in early career years benefit most.
ERISA exemptions for government and church plans: A critical structural difference from 401(k)s is that governmental 403(b) plans (for public school teachers, state university employees) and church 403(b) plans are exempt from ERISA's fiduciary, reporting, and participant rights requirements. This means that public school teachers have fewer legal protections against excessive fees or poor investment options than private-sector employees — a gap that has driven many states to strengthen their own oversight. Church plans can be sponsored under § 403(b)(9) with minimal regulatory overhead, though at the cost of ERISA's participant protections.
How It Affects You
<!-- pria:personalize type="impact" -->If you're a teacher or school district employee: Your district's 403(b) plan is a supplement to your pension, not a replacement. Many teachers contribute to a 403(b) to build supplemental savings beyond the defined benefit plan. Be cautious about vendor selection: school districts often allow multiple 403(b) vendors to solicit employees, and insurance company annuity products with high surrender charges and expensive subaccounts are common. To find a low-cost option: ask HR for the complete list of approved 403(b) vendors in your district, then visit each vendor's website or call them to get expense ratios for their investment options. TIAA's institutional mutual fund accounts and Fidelity's and Vanguard's school-district plans often have expense ratios under 0.10-0.20%. Insurance company annuity subaccounts typically run 0.5-1.5% or higher — a 1.3% difference on a $200,000 balance compounds to over $100,000 in foregone growth over 20 years. If you're already in a high-cost annuity product, check for surrender charges (typically 5-7 years) before transferring; after the surrender period expires, transferring to a lower-cost provider within the district's approved list is free.
If you work at a hospital or university: Many healthcare and higher education employers offer both a 403(b) and a 457(b) plan. Because 403(b) and governmental 457(b) contribution limits are independent — you can max out both in the same year — this creates an extraordinary tax-deferral opportunity. A physician or senior administrator who maxes both a 403(b) ($24,500 + $8,000 catch-up = $32,500 if 50+) and a governmental 457(b) ($32,500 at 50+) can shelter $65,000 per year from federal income tax, plus any employer match or contributions that count against the § 415 limit. If your employer offers both, take full advantage of both.
If you have 15+ years of service and have under-contributed: The § 402(g)(7) 15-year catch-up lets you contribute an extra $3,000/year (up to $15,000 lifetime) if you work at a hospital, school system, church, or qualifying health/welfare agency. The formula: your available catch-up is the lesser of (i) $3,000, (ii) $15,000 minus prior 15-year catch-up contributions already used, or (iii) $5,000 × years of service minus your total deferrals across all prior years. Example: a teacher with 15 years who averaged $4,000/year has contributed $60,000; $5,000 × 15 = $75,000; the difference is $15,000 — the full $15,000 lifetime catch-up is available and can be used as $3,000/year for 5 years. But a nurse who consistently maxed out ($20,000+ per year over 15 years) has no headroom. Ask your plan administrator to calculate your availability — most vendors won't volunteer it. This catch-up applies in addition to the age-50 catch-up ($8,000 in 2026), but if you also qualify for the SECURE 2.0 ages 60-63 enhanced catch-up ($11,250 in 2026), you take the larger of the two 15-year vs. ages 60-63 amounts.
If you're leaving a 403(b) job: You can roll to a Traditional IRA, a new employer's 401(k) or 403(b), or a governmental 457(b). The key trap for annuity-based 403(b) accounts: surrender charges. Insurance company annuity contracts often have surrender periods of 5-10 years, with charges starting at 7-8% and declining annually. The surrender period runs from the date each contribution was made — so some older contributions may be charge-free while recent ones still have a charge. Before rolling over, call the insurance company and ask for a "surrender charge breakdown by contribution tranche." If surrender charges are significant, model whether paying the charge now (to escape ongoing high expense ratios) beats waiting. A $50,000 account with a 5% surrender charge ($2,500 cost) escaping a 1.2% excess expense ratio saves $600/year — breaking even in about 4 years.
<!-- /pria:personalize -->State Variations
State income tax treatment of 403(b) contributions generally mirrors the federal exclusion — most states allow the pre-tax deferral to reduce state taxable income. However, some states (notably Pennsylvania) do not allow a pre-tax exclusion for 403(b) salary deferrals, meaning Pennsylvania employees pay state income tax on contributions they make to their 403(b). New Jersey has similar non-conformity on some contribution types. Always verify your state's treatment before relying on combined federal-plus-state tax savings calculations. California conforms to federal 403(b) rules.
Pending Legislation
SECURE 2.0 (2022) made significant changes to 403(b) plans — particularly requiring automatic enrollment at 3% for new plans starting in 2025, and allowing automatic escalation. SECURE 2.0 also allowed 403(b) plans to participate in group collective investment trusts (CITs), previously available only to 401(k) plans, enabling lower-cost institutional investment options. Further rulemaking from the Treasury and IRS is expected to clarify the new automatic enrollment requirements.
Recent Developments
The SECURE 2.0 Act (signed December 2022) extended auto-enrollment requirements and Roth deferral options to 403(b) plans. Beginning January 2025, new 403(b) plans established by § 501(c)(3) employers must automatically enroll eligible employees at 3% of compensation and automatically escalate contributions by 1% per year up to at least 10% (maximum 15%). Employees can opt out. Existing plans are grandfathered. Treasury proposed regulations in 2024 addressing collective investment trusts and other SECURE 2.0 403(b) provisions. The 403(b) plan market remains dominated by TIAA, Fidelity, Vanguard, and large insurance carriers; competition on fees has increased substantially since 2010, benefiting participants at larger institutions.