Both the 401(k) and 403(b) savings accounts are commonly used retirement plans. However, there are important differences between the two. Most employers offer either the 401(k) or the 403(b) to their employees. If your employer offers both plans, be sure to research both plans to determine which one is best for your personal needs.
A 401(k) and 403(b) plan have different eligibility requirements. Only employees of certain establishments, such as public school systems, non-profit organizations, some ministers, and some hospital services, are eligible for 403(b) plans. On the other hand, 401(k) plans can be administered by a wide variety of organizations, including corporations, partnerships and sole proprietorships. Employees must be at least 21 years old to qualify for either plan, and some plans may require an initial time period of employment before the plan begins.
Although there are differences between 401(k) and 403(b) plans, they still have a lot in common. For example, both plans have identical annual contribution limits of $17,000 as of 2012. Both plans also allow for catch-up contributions after age 50, which permit employees to make additional contributions. Both plans also allow for distribution of funds in the case of death, disability, severance from employment and early retirement at age 59 1/2.
Besides the eligibility requirements, there are some key differences between 401(k) and 403(b) plans. A 403(b) plan has more investment restrictions than 401(k) plans, and are limited to either mutual funds or annuities. A 403(b) plan sometimes allows employees who have provided at least 15 years of service to qualify for higher contribution limits, which is beneficial for eligible employees who expect to be employed with the same company for a long period of time.
Considerations for Companies
Individual employees aren't the only ones who have to choose between retirement plans. Companies also have to decide which is best both for their employees and their own needs. For example, 403(b) plans are exempt from ADP, or nondiscrimination testing, which makes them a bit more convenient than 401(k) plans. They can also be exempt from the Employee Retirement Income Security Act (ERISA), as long as the company plays a minimal role in employee 403(b) contributions.
- Investopedia: 401(k) And Qualified Plans: Eligibility Requirements
- Investopedia: 403(b) Plan: Eligibility Requirements
- 401k Center: What is the Eligibility for a 401k Retirement Fund?
- Internal Revenue Service: Retirement Topics - 403(b) Contribution Limits
- Internal Revenue Service: 401(k) Resource Guide
- McKay Hochman Company: Comparison of Code 403b and 401k Plans
- Internal Revenue Service: Choosing a Retirement Plan: 403(b) Tax-Sheltered Annuity Plan
- Plan Adviser: 403(b) Plans - Siblings, Not Twins
- Fort William LLC: Should Nonprofits Switch From 403(b) to 401(k)?
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