Until recently, 403(b) plans weren’t considered a “hot topic.”  However, the new auditing requirements for the plans have brought up new and more questions about them.  Here is some basic information about 403(b) plans:

Contributions –The 2010 contribution limit is $16,500, which is the same as it was in 2009.  Participants over the age of 50 can make additional contributions of up to $5,500, which are known as catch-up contributions.  Employers can make matching or other employer contributions, as well.  It should be noted that total contributions (employee and employer combined) cannot exceed the lesser of $49,000 or 100% of total employee compensation.

The “15 years of service provision” is something unique to 403(b) plans.  Participants with at least 15 years of service to their employer can increase their 403(b) contribution based on certain criteria.  The 15-Year Rule allows a participant to electively defer as much as $19,500 in 2010.

Employers are required to remit the participants’ contributions within an administratively feasible time period – which is considered to be at least 15 days following the month in which the amounts would have otherwise been paid to the participant as wages.  However, just as is the case with 401(k) plans, it’s usually a much quicker process than that.

Early Withdrawals – A 10% penalty tax will be imposed on withdrawals from 403(b) plans prior to the age of 59½.  This is in addition to normal tax consequences unless certain criteria are met (i.e., hardship, disability, death, made due to an IRS levy upon the participant account, etc.)

Loans – Like 401(k) plans, there are provisions for participants to take out loans against their 403(b) plan account balances.  The loan cannot exceed $50,000 or half of the account balance.  Principal and interest must be paid at least quarterly, and the loan must be repaid within 5 years unless the proceeds were used to acquire a primary residence.

Hardship-403(b) plans allow for hardship withdrawals for expenses including unreimbursed medical bills, tuition payments, or in the event of a foreclosure on a primary residence.

Terminated Employees – If a participant leaves his or her employer, there are several options available for the plan account balances.  Assets can be transferred into a new employer’s plan (if permitted), assets can be rolled into a Rollover IRA, assets can be left in the plan, or the employee can take a lump sum distribution.  In the case of the distribution option, keep in mind there are tax consequences and penalties to consider.

Retirement – At the time of retirement (age 59½), withdrawals will be taxed as ordinary income.  Required minimum distributions must occur by April 1st of the year following the calendar year in which the participant turns 70½ years old.

Jessica Puckett, CPA, CFE