Types of Institutions Eligible to Sponsor a 403(b) Plan

Did the regulations make any changes in the eligibility rules for establishing a 403(b) plan?

No. Any employer can generally set up a qualified retirement plan, although government employers are not currently permitted to set up new 401(k) plans. The four types of employers that are permitted to sponsor a 403(b) plan are:

  • Public education organizations such public elementary and high schools, boards of education, and state colleges and universities g
  • 501(c)(3) nonprofit organizations such as private schools, research facilities, private hospitals, charities, social welfare agencies, healthcare organizations, and religious institutions
  • Grandfathered Indian tribal governments
  • Certain religious ministers of a church or related religious organization

What regulatory requirements apply to 403(b) plans?

403(b) plans are subject to the Internal Revenue Code, and many are subject to the Employee Retirement Income Security Act (ERISA) and Department of Labor requirements. The basic regulatory requirements are listed in the Basic Compliance Requirements chart. Special exemptions from some of these regulatory requirements are available to plans sponsored by certain types of employers:

  • A governmental plan
  • A non-electing church plan*
  • A TDA plan exempt from ERISA under DOL regulation 2510.3-2(f), that satisfies narrowly drawn exceptions including:
    • participation is completely voluntary,
    • employer involvement is sufficiently limited to, among other matters, collecting and remitting payments as required by the salary deferral agreements, and limiting funding choices available to employees to a number and selection designed to provide a reasonable choice,
    • the annuity companies are permitted to publicize their products to employees,
    • all rights under the contracts are enforceable only by the participant or beneficiary, and
    • the employer is not compensated for performing duties in connection with the salary deferral agreements.

*A church must make a valid IRC section 410(d) election for the 403(b) plan to be subject to ERISA.

Even plans that are exempt from some federal regulatory requirements are subject to many requirements, including the following:

  • All 403(b) plans must have put plan provisions in writing by December 31, 2009.
  • All 403(b) plans must be operated in compliance with their written provisions.
  • All 403(b) plans that permit participants to transfer accumulations to vendors not currently authorized to accept plan contributions must have entered into an ISA before 2009.
  • All 403(b) plans that permit any employee to make voluntary elective deferrals must generally make this option available to any employee willing to make contributions of at least $200 a year. (Limited exceptions are permitted for certain categories of employees).
  • All 403(b) plans, other than church plans, must calculate employer contributions based on the compensation limits of Section 401(a)(17) of the Internal Revenue Code, although special grandfather rules are generally available to employees who became participants in public plans prior to 1996.
  • Contributions to all 403(b) plans are subject to the limits of Sections 402(g) and 415 of the Internal Revenue Code.

Who is eligible to participate in a 403(b) plan?

Only common-law employees of an employer may participate in a 403(b) plan. Generally an individual can be covered by a 403(b) plan only if he or she qualifies as an employee of the plan sponsor for FICA and FUTA purposes. Independent contractors and employees of affiliated organizations are not eligible.

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