403(b) plan

What a 403(b) plan is

A 403(b), also called a tax-sheltered annuity plan, lets employees of eligible employers defer pay on a pre-tax or Roth basis, and the employer can contribute too. Investments are limited to annuity contracts and custodial accounts that hold mutual funds.

Why it matters to employers

A for-profit company cannot sponsor a 403(b). A 501(c)(3) nonprofit can choose either a 403(b) or a 401(k). Employee deferrals in a 403(b) are not ADP tested. Instead the plan must meet a universal availability rule: if any employee may defer, nearly all must be allowed to. Employer matching contributions are still ACP tested in most plans. ERISA applies unless the employer is a government or church, or keeps its involvement within a narrow Department of Labor safe harbor.

Example with 2026 figures

A nonprofit employee can defer $24,500 in 2026, plus an $8,000 catch-up at age 50 or older. Some employees with 15 or more years of service at the same eligible employer can add up to $3,000 more a year under a 403(b)-only catch-up.

For 2027 the deferral limit rises to $25,500, plus an $8,500 catch-up at 50 or older. (IRS Notice 2026-66)

Common mistakes

• Excluding employees from deferring in a way that breaks universal availability, for example part-time staff who normally work 20 or more hours a week.

• Assuming the plan is outside ERISA while the employer makes contributions or chooses the investments.

• Forgetting that a person’s deferral limit is shared across their 403(b) and 401(k) plans.