What is a 403(b) plan?
How does a 403(b) plan work?
What is an "Employer Match"?
What is a 401(k) plan?
What is a 457(b) plan?
How does a 457(b) plan work?
How much can I contribute to my 403(b) plan?
What are pre-tax contributions?

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.

How does a 403(b) plan work?
First and foremost, these programs are considered employer sponsored plans. Eligible employees of a plan sponsor are given the opportunity to participate in the plan and contributions on their behalf are made to one of three types of accounts:

The following types of contributions can be made to 403(b) accounts:

1) Elective deferrals. These are contributions made under a salary reduction agreement. This agreement allows the employer to withhold money from the employee's paycheck to be contributed directly into a 403(b) account for their benefit. They do not pay tax on these contributions until they withdraw them from the account.
2) Nonelective contributions. These are employer contributions that are not made under a salary reduction agreement. Nonelective contributions include matching contributions, discretionary contributions, and mandatory contributions from the employer. They do not pay tax on these contributions until they withdraw them from the account.
3) After-tax contributions. These are contributions made with funds that must be included as income on the participant's tax return. A salary payment on which income tax has been withheld is a source of these contributions. If the plan allows for after-tax contributions, the participant's contributions are not excluded from income and cannot be deducted on the participant's tax return.
4) A combination of any of the three contribution types listed above.

What is an "Employer Match"?
Some employers make a matching contribution to an employee's account based on the amounts an employee contributes as an "elective deferral". Some plans may require the employee to work a certain number of hours in order to receive the matching contribution or to be employed on the last day of the plan year. These amounts vary by employer and are not a requirement for a 403(b) plan arrangement. It is wise to contribute an amount sufficient to receive the maximum employee match. Employee matches can occur in both 401(k) & 403(b) plans.

What is a 401(k) plan?
A section 401(k) plan is a type of deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her wages to the plan on a pre-tax basis. These deferred wages are not subject to income tax withholding at the time of deferral, and they are not reflected on the Form 1040 since they were not included in the taxable wages on Form W-2. However, they are included as wages subject to social security, Medicare, and federal unemployment taxes. The distinct difference between a 401(k) and a 403(b) is the definition of eligible employer. The 401(k) plan is only available to for-profit entities and 501(c)(3) organizations.

What is a 457(b) plan?
Plans of deferred compensation described in IRC section 457(b) are available for certain state and local governments and non-governmental entities tax exempt under IRC 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).

How does a 457(b) plan work?
These plans are considered employer sponsored. Regulation mandates a written trust document outlining all provisions of the plan identifying all eligible employees, types of contributions, and benefits paid. If the plan is sponsored by a governmental entity, all assets must be sheltered in a trust or invested in:

The following types of contributions can be made to 457(b) accounts:

1) Elective deferrals. These are contributions made under a salary reduction agreement. This agreement allows the employer to withhold money from the employees' paycheck to be contributed directly into a 457(b) account for their benefit. Taxes are not paid on these contributions until they are withdrawn from the account.
2) Nonelective contributions. These are employer contributions that are not made under a salary reduction agreement. Nonelective contributions include matching contributions, discretionary contributions, and mandatory contributions from the employer. Taxes are not paid on these contributions until they are withdrawn from the account.
3) After-tax contributions. These are contributions made with funds that must be included in income on a participant's tax return. A salary payment on which income tax has been withheld is a source of these contributions. If the plan allows for after-tax contributions, the participant's contributions are not excluded from income and cannot be deducted on the participant's tax return.
4) A combination of any of the three contribution types listed above.

How much can I contribute to my 403(b) plan?
There are limits to the maximum amount that can be contributed to a 403(b) account. The maximum allowable contribution (MAC) must be determined per employee. It is based on the years of service with the employer, past contributions, compensation, and age of the employee. Under the general limit on elective deferrals, the most that can be contributed to a 403(b) account through a salary reduction agreement for 2006 is $15,000 and for 2007 is $15,500 (indexed thereafter). This limit applies without regard to community property laws.

What are pre-tax contributions?
A pre-tax contribution is money that is deducted from an employee's pay prior to federal or state income taxes deductions. This lowers the employee's taxable income for the year, thus reducing income tax liability. Due to these tax advantages, the IRS restricts when the employee can withdrawal such contributions until meeting a distributable event.