Source: IRS Publication 571 (01/2018), Tax-Sheltered Annuity Plans (403b Plans)
What Is a 403(b) Plan?
A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.
Individual accounts in a 403(b) plan can be any of the following types.
- An annuity contract, which is a contract provided through an insurance company.
- A custodial account, which is an account invested in mutual funds.
What Are the Benefits of Contributing to a 403(b) Plan?
There are three benefits to contributing to a 403(b) plan.
- The first benefit is that you don’t pay income tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Allowable contributions to a 403(b) plan are either excluded or deducted from your income. However, if your contributions are made to a Roth contribution program, this benefit doesn’t apply. Instead, you pay income tax on the contributions to the plan but distributions from the plan (if certain requirements are met) are tax free.Note. Generally, employees must pay social security and Medicare tax on their contributions to a 403(b) plan, including those made under a salary reduction agreement. See chapter 4, Limit on Elective Deferrals , for more information.
- The second benefit is that earnings and gains on amounts in your 403(b) account aren’t taxed until you withdraw them. Earnings and gains on amounts in a Roth contribution program aren’t taxed if your withdrawals are qualified distributions. Otherwise, they are taxed when you withdraw them.
- The third benefit is that you may be eligible to take a credit for elective deferrals contributed to your 403(b) account. See chapter 10,Retirement Savings Contributions Credit (Saver's Credit) .
Excluded: If an amount is excluded from your income, it isn’t included in your total wages on your Form W-2. This means that you don’t report the excluded amount on your tax return.
Deducted: If an amount is deducted from your income, it is included with your other wages on your Form W-2. You report this amount on your tax return, but you are allowed to subtract it when figuring the amount of income on which you must pay tax.
Who Can Participate in a 403(b) Plan?
Any eligible employee can participate in a 403(b) plan. The following employees are eligible to participate in a 403(b) plan:
- Employees of tax-exempt organizations established under section 501(c)(3). These organizations are usually referred to as section 501(c)(3) organizations or simply 501(c)(3) organizations.
- Employees of public school systems who are involved in the day-to-day operations of a school.
- Employees of cooperative hospital service organizations.
- Civilian faculty and staff of the Uniformed Services University of the Health Sciences.
- Employees of public school systems organized by Indian tribal governments.
- Certain ministers
For more information regarding 403b accounts please visit the IRS- 403(b) Plan Basics.
How Do I Set Up An Account?
- Select a vendor from Saline Area Schools Approved Vendor List and set up an account
- Determine the amount you wish to contribute on a per-pay basis. Complete and submit the online 403b Contribution Agreement Form. Your form will then be forwarded to our Third Party 403b Plan Administrator, MEA Financial Services. Once approved, your deduction will be set up in payroll. You may adjust your contribution at anytime by resubmitting the Contribution Agreement Form.
- Confidential Participant Account Form is REQUIRED for all employees who have NEVER contributed to their school district's 403b plan.
Note: The employee understands that Saline Area Schools will rely on the accuracy of the data provided by the Employee when giving the Employee any assistance in determining the Employee’s pre-tax and post-tax contribution limits under Code Section 403(b) and 415. The Employee agrees that all computations done in connection with salary reduction/deduction authorized above, including eligible compensation, years of service, and prior contributions, pursuant to Code Sections 403(b) and 415 shall remain the sole responsibility of the Employee.