Tax Exempt and Government Entities
403(b)  
                                                                                EMPLOYEE PLANS DIVISION
Tax-Sheltered  
Annuities for

Sponsors

  403(b) plan is a retirement plan offered by a public school or 501(c)(3)  
     tax-exempt organization for its employees. An employee can only obtain a 
                                                        *
       403(b) annuity or custodial account  under an employer’s 403(b) plan. These 
A
annuities and custodial accounts are funded by employee elective deferrals made 
under salary reduction agreements, employer contributions or a combination of both. 

Read on to learn about:

n Common 403(b) plan mistakes, and 
n IRS products (including the 403(b) Fix-It Guide), services and assistance to help you 
keep your 403(b) plan healthy

Be aware of common mistakes
As a 403(b) plan sponsor, it’s important to know the tax rules that apply to your 403(b) 
plan and to pay attention to the operation of your plan so you can:

n maximize your employees’ retirement benefits,

n comply with the law, and

n avoid additional taxes and penalties

  *Unless otherwise stated, references to 403(b) annuities in this publication  
 will generally also apply to 403(b) custodial accounts.

403(b)

 403(b) Tax-Sheltered Annuity Plans

Common Mistakes
 It’s important to know the tax rules that  apply to your 403(b) plan  
 and to pay attention to the operation of your plan.

 The IRS commonly finds mistakes in 403(b) plans in these areas:

 Written plan requirement. You must have a written plan that describes the way the plan  
 will work and you must operate your plan accordingly. 
   A 403(b) plan doesn’t need to be a single plan document. For example, you may compile 
 the salary reduction agreements, the contracts that fund the plan, and written procedures for 
 eligibility, benefits, dollar limitations, nondiscrimination and universal availability. However, a 
 single plan document makes administration easier, especially if your plan has multiple vendors.

 Ineligible employer. Generally, only public schools and 501(c)(3) tax-exempt organizations 
 may sponsor a 403(b) plan.

 Universal availability.  If you allow one employee to make elective deferrals, you must  
 allow all eligible employees to make them. You may exclude certain groups of employees, 
 such as those normally working fewer than 20 hours per week (less than 1,000 hours per 
 year), students performing certain service, employees who are eligible for elective deferrals 
 under another plan you sponsor and non-resident aliens. You must notify employees of their 
 eligibility to make an initial or change an existing deferral election at least once a year.

 Depositing elective deferrals. You must send your employees’ deferrals to their annuity 
 providers as soon as is reasonable for proper plan administration (but no later than 15 days 
 following the month of the pay date). If your plan provides an earlier time for transferring  
 elective deferrals, you must follow it.

 Excess elective deferrals. The general limit on employee elective deferrals is $18,000 in  
 2017 (indexed thereafter). If the plan allows, employees may also make catch-up contributions. 
 n 15-years-of-service catch-up contribution,
   n available for certain employers (such as schools, hospitals, churches),
   n employee must have 15 years of service,
   n limited to least of: 
     n $3,000,
     n $15,000 less previously excluded special catch-ups, or,
     n $5,000 multiplied by years of service minus previously excluded deferrals,
 n Age 50 catch-up contribution,
   n additional $6,000 (in 2017, indexed for inflation),

          403(b) Plan

continued            Common Mistakes

                     Catch-up contributions must be applied to the 15-years-of-service catch-up (if available)  
                     before being applied to the age-50 catch-up (See irs.gov/retirement for examples).  
                        You must distribute excess deferrals plus earnings to employees no later than the following 
                     April 15 to avoid additional taxes and penalties for the employee and employer. If you don’t 
                     timely correct excess deferrals, then you’ll have underreported your employees’ taxable  
                     wages on your employment tax return. This will result in withholding too few taxes from your 
                     employees’ wages and you’ll be responsible for the underpayment and penalties.

                     Employer and employee contributions. The limit on total employer and employee contri- 
                     butions is $54,000 (for 2017, indexed thereafter). The 15-years-of-service catch-up is included 
                     in this limit, but the age-50 catch-up isn’t. Therefore, the limit for employees who are at least 
                     age 50 is up to $60,000 for 2017. 

                     Loans. Loans that don’t meet the tax rules may be deemed a taxable distribution that’s 
                     reported to the employee as income. Some examples are loans when required payments are 
                     missed or loans that exceed the limit, often because of loans from multiple vendors.

                     Hardship distributions. Hardship distributions are considered early distributions if:
                     n   you didn’t get adequate documentation of the financial need,
                     n   the employee didn’t use other reasonably available financial means, or
                     n   distributions from all vendors exceed the amount of the hardship or the amount of  
                       the employee’s elective deferrals.

                     Post-severance contributions. Plans may allow for elective deferral and/or employer contri-
                     butions after an employee separates from service.

                     n  Elective deferrals. Employees may generally defer—up to their annual limits—their unpaid 
                     regular pay and unused vacation and sick pay if done before the end of the year they left your 
                     employment, or 2½ months from the date of severance, if later.

                     n  Employer contributions. You may contribute up to the annual limit to a former employee’s 
                     account for up to five years following the end of the year they left your employment. (Note: 
                     The former employee can’t elect to receive this money in cash instead of depositing it in their 
                     403(b) account.) All contributions must end upon the employee’s death.

                     In-service exchanges and transfers. 
                     n  In-service contract exchanges take place within the same plan. For these to occur, the 403(b) 
                     plan must permit the movement of the funds and you must follow the plan terms. Benefits 
                     can’t be reduced and the moved funds must have at least the same distribution restrictions. 
                     You and the receiving annuity issuer must agree to share certain information needed for plan 
                     administration. 

                     n  Plan transfers take place between two 403(b) plans. For these to occur, both plans must 
                     permit the movement of the funds. In addition, the participant must be a current or former 

                   403(b) Plan

continuedcontinued            Common Mistakes

                              employee of the receiving plan sponsor. Benefits can’t be reduced and the moved funds  
                              must be subject to at least the same distribution restrictions. 

                              If you find a mistake in your 403(b) plan, take steps to bring it into compliance so your  
                              employees can continue to save for retirement on a tax-favored basis. You need to timely 
                              correct plan mistakes to avoid additional taxes and penalties that may affect you and your 
                              employees. You may want to contact a tax professional for help. You can correct most  
                              403(b) plan mistakes through the IRS correction programs. See                Correcting plan errors at  
                              www.irs.gov/retirement for additional information.

                              To Learn More…

                              The following publications cover 403(b) plans, other retirement plans and  
                              correction programs: 

                              n Publication 15, (Circular E), Employer’s Tax Guide,
                              n Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools  
                                and Certain Tax-Exempt Organizations, 
                              n Publication 575, Pension and Annuity Income,
                              n Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) 
                              n Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
                              n Publication 4224, Retirement Plan Correction Programs,
                              n Publication 4482, 403(b) Tax-Sheltered Annuities for Participants,
                              n Publication 4484, Choose a Retirement Plan,
                              n Publication 4546, 403(b) Plan Checklist,

                              Download these publications at www.irs.gov/retirement.

                              Visit www.irs.gov/retirement for online resources covering specific retirement plans (including  
                              403(b) plans). This site has tools such as:
                              n the 403(b) Plan Fix-It Guide,
                              n a checklist for maintaining your plan,
                              n answers to frequently asked questions, and      ,
                              n a page devoted to correction programs to assist you in correcting errors if you discover them  
                                in the operation of your plan.    

                                                    Publication 4483 (Rev. 8-2017)  Catalog Number 47243V  
                                                    Department of the Treasury  Internal Revenue Service  
                                                                      www.irs.gov