403B Plan Rules
Employees of tax-exempt organizations such as schools or non-profits often have the opportunity to participate in a employer-sponsored Tax-Sheltered Annuity, also known as a 403b plan. To participate, the employee must be eligible based on the plan's adoption agreement. A 403b plan has certain unique benefits rules to encourage loyalty to the organization with many years of service.
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Eligibility
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Employees of a tax-exempt organization become eligible to participate in the 403b plan based on the selected requirements when the employer establishes the adoption agreement. School and hospital employees as well as ministers and Indian tribal government school employees may participate once the required years of service outlined in the plan adoption agreement is met. Each 403b has its own plan administrator who coordinates with payroll services to make contributions and provide investment alternatives for each employee to select.
Contribution Limits
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There are three types of contributions: elective, non-elective and after-tax. Elective contributions are the funds an employee asks to have taken out of paychecks. The contribution reduces annual gross income and grows deferred in the 403b account. Non-elective contributions are made by the employer who may match employee contributions or make mandatory contributions. These also grow tax-deferred. The total 2011 contribution limit is $49,000 with $16,500 able to come from the employee elective contribution. After-tax contributions are contributions made that do not reduce annual income. After-tax contributions grow tax free but the earnings grow tax-deferred. Catch-up contributions are available for 403b participants over the age of 50, allowing another $5,500 in annual elective contributions.
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Early Retirement
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When an employee leaves the organization, he has the chance to rollover 403b plan funds into a self-directed IRA. This gives the participant more control over the investments but isn't always the best choice. For an employee who stays with the organization through is fiftieth birthday and keeps the assets in the 403b plan, a new options arises for early retirement income. In this scenario, the IRS allows normal distributions to start at age 55 instead of the standard 59.5. This eliminates the 10 percent tax penalty concerns. This feature is only available in 403b plans, not IRAs, 401ks or SIMPLE IRA plans. Once the money is rolled out, the participant loses this option.
15-Year Rule
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A participant who has been with the organization for more than 15 years has an additional option to save more toward retirement. The IRS allows 403b participants of more than 15 years of service to increase annual elective contribution limits. The participant may choose the lower of three options. The first is to increase annual elective contribution limits by $3,000. The second uses a formula of taking $15,000 and subtracting any previous increased limits granted in the 15-Year Rule. The last option multiplies $5,000 by the service years less all total elective deferrals previously taken. Your plan administrator or tax adviser can run the numbers for your unique situation.
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