401(k) vs. 403(b)

What is a 401(k)?

A 401(k) plan is one of the most common types of retirement plans in the U.S. A 401(k) is a type of employer-sponsored defined contribution plan that allows both the employer and the employees to make tax-deferred contributions of up to $23,000 ($30,500 if age 50 or older) per year toward retirement savings. Any entity type can sponsor a 401(k) plan.

What is a 403(b)?

A 403(b) plan is a type of employer-sponsored defined contribution plan that allows both the employer and the employees to make tax-deferred contributions of up to $23,000 ($30,500 if age 50 or older) per year toward retirement savings. 403(b) plans are less common than 401(k) plans because only tax-exempt entities are able to sponsor a 403(b) plan.

What is the Difference Between a 401(k) and a 403(b)?

Both 401(k) and 403(b) plans are excellent savings vehicles for retirement. However, they do have some differences. The main difference is who is able to provide these plans. Only tax-exempt entities (like a schools, hospitals, churches, or charities) can sponsor a 403(b) plan. Business entities can’t sponsor a 403(b) plan, but they can sponsor a 401(k) plan. Tax-exempt organizations can choose to sponsor either a 401(k) or a 403(b) plan.

There are also a few compliance differences between 401(k) and 403(b) plans. 403(b) plans aren’t required to pass Actual Deferral Percentage testing (ADP testing) or top heavy testing; 401(k) plans are required to pass these tests annually. 403(b) plans aren’t always required to comply with ERISA, whereas 401(k) plans are. 403(b) plans are only required to file IRS Form 5500 if they are ERISA-covered; 401(k) plans are required to file IRS Form 5500 annually.

403(b) and 401(k) plans also differ in the type of investments they are allowed to offer. 403(b) plans are limited to only annuities or mutual funds, while 401(k) plans can also include stocks, bonds, ETFs, and collective funds.

How Are 401(k) and 403(b) Plans Similar?

While there are a few differences between 401(k) and 403(b) plans, these plans are mostly very similar.

Both plans provide a tax-deferred vehicle for employees to save for retirement. The annual contribution maximums are the same, and both can allow for Roth contributions (in addition to pre-tax contributions). 401(k) and 403(b) plans both also have a 10% penalty if funds are withdrawn prior to age 59½.

How Do 401(k) and 403(b) Plans Compare Against Each Other?

The below chart outlines how 401(k) plans compare to 403(b) plans:

Which Type of Retirement Plan Is Best For My Non-Profit Organization?

Non-profit organizations can choose to sponsor either a 403(b) or a 401(k) plan, but determining which of these plan types is best can be complicated. The way to determine which of these plans is best for your organization is to seek guidance from an advisor who specializes in retirement plans for non-profit organizations. A specialized advisor will be able to help you navigate the pros and cons of each plan type, and help assess which makes the most sense for your organization.

At Fisher Investments, we specialize in helping non-profit organizations set up and administer retirement plans tailored to fit the unique needs of their employees.