Of all our retirement plans, the 403B offers special benefits for employees of our churches and schools. There are also some very special benefits for ordained ministers with the 403b-9 added on for them. Most plans of this nature have large setup costs and administrative fees. There are no setup costs or administrative fees for our client religious organizations. Presently we are offering these plans with one of the market's new hot products called the Equity Indexed Annuity, as well as a choice of traditional funding plans. For a review of the benefits of funding with an Indexed Annuity, please refer to that area of our site by clicking here:
Please refer to your own specific contract for the exclusions, additions, use and definitions of the terms, and information given below; it may vary some with different plans or contracts.
WHAT IS A 403b?
The 403b is a tax-deferred retirement plan for employees of educational institutions, churches and certain other non-profit organizations, and is funded by contributions to an annuity contract with an insurance company. Employees can save by deferring current salary on a before-tax basis (a salary reduction for income tax purposes). Contributions and investment earnings grow tax-deferred until withdrawal. These can be funded by:
- Employee contributions
- Employer contributions
- Employer and Employee contributions in a combination
Benefits for the employer:
- Funded from dollars otherwise paid as salary
- Helps recruit and keep quality employees
- Helps employees build retirement security at no cost to the employer
- Employer can choose to contribute with a varying contribution, as budget constraints may dictate from year to year.
Benefits for the employee:
- Contribution amounts can vary from year to year to meet budget constraints
- Reduces taxable income
- Saves through easy payroll deduction
- Each employee can choose their own specific amount to save
- Security provided for the employee in owning 100% of contributions
- Deferred taxes until plan pays benefits
- Contributions can be suspended at any time after the first year to meet budget constraints.
HOW DOES THE 403b PLAN WORK?
- Employees choose whether they want to participate or not
- The employee executes a pre-tax salary reduction agreement
- Employer must agree to make contributions in accordance with the salary reduction agreement
- Money is directed to the insurance company for investment
- Employee can match contributions up to a desired amount or other pattern as both agree to
- Funds grow tax-deferred until retirement
- Accumulations are taxed when withdrawn for retirement
- All funds received as paid benefits are taxed at your retirement tax bracket when received
- Disbursement of funds must begin April 1 in the year you turn 70 1/2 years old
- Minimum IRS disbursements rules apply
HOW MUCH CAN BE CONTRIBUTED ANNUALLY?
For 2008, employees are able to contribute the smaller of
- The new elective deferral limit of $15,500 or
- Up to 100% of includible compensation (must be less than the elective deferral limit) or
- For those with employer matches or other employer contributions, limits are $41,000 or 100% of compensation (whichever is less). Note: the employee is still limited to the employee elective deferral limit. An employer can add up to another $29,000.
- In addition, if an employee turned age 50, they can contribute an additional $20,500
Note: There is a provision of the Internal Revenue Code that temporarily increases the elective deferral limit for those eligible employees. This increase is know as the 15-year-rule. This special provision increases the elective deferral limit by as much as $3,000 more than the current $15,500 limit (as of 2008). To qualify, the employee must have completed at least 15 years of service with the same employer (years of service need not be consecutive), and they cannot have contributed more than an average of $5,000 in the previous years. The increase in the elective deferral limit cannot exceed $3,000 per year under this provision, up to a $15,500 lifetime maximum. If the employee has 15 or more years of service with the same employer, it is highly recommended that they consult with a tax professional concerning the limits on their contributions for best results.
The minimum contribution, $50 per month.
THE POWER OF TAX DEFERRAL, CONTRIBUTION EXAMPLE:
Assuming a 28% Federal tax bracket and a 5% state tax bracket (may also be affected by local and other tax)
- Pre-tax contribution (monthly) : $ 100
- Actual deduction from paycheck : $ 67
- Annual investment savings : $1,200
- Annual deduction from paycheck : $ 804
QUESTIONS YOU MIGHT ASK ABOUT THE 403b
1. Can a 403b be rolled to an IRA? Yes
- When employee separates from service (changes jobs)
- When employee becomes disabled
- When employee retires
- When employee dies
2. Can another 403b be rolled into a current 403b? Yes
3 Can an organization have more than one plan? Yes
- The total annual combined contributions for an employee must be less than $15,500 (for 2008)
4 Can an IRA be rolled into a 403b? No
5. If your denomination offers a retirement plan, can your individual church offer a plan too? Yes
- The total annual combined contributions for an employee must be less than $15,500 (for 2008 )
6. The differences between a TSA (403b) and a 401k.
- The basics are the same, however, the TSA is more flexible since the participant has control?
- The biggest difference is the eligibility between the two plans. A qualified employer, in the eyes of the IRS, is an organization that is "organized and operated exclusively for religious, charitable, scientific, public-safety testing, literary, or educational purposes." These types of institutions include K-12 public schools, colleges, universities, hospitals, libraries, philanthropic organizations, and churches. If there are qualifing organizational questions please check with the IRS.
Providing a 403b opportunity for your employees promotes retention and moral with your employees. For our church and school clients, there is no set-up cost or adm. fees. One or all employees can choose to contribute to the 403b plan. Many times employers think that in order to offer a plan, each employee must contribute; that is not the case with this plan. Each employee has their own choice as to whether or not they contribute.
THE 403b-9 ADDITIONAL PROVISIONS JUST FOR ORDAINED MINISTERS:
- Ministers are able to contribute and can also have the church contribute for them just like the employees
- Ministers contributions grow tax-deferred like the employees.
- The difference for the minister is the withdrawal tax benefit added just for them, which can be very helpful when the minister starts their withdrawal
- If the minister does not live in provided housing upon withdrawal, the minister can withdraw a portion or all of the benefit, tax free, which is equal to the fair market rental value of home. This can also include sums equal to the funds for furnishings which are reasonable for the home quality and price, lawn care, and maintenance repairs to the residence. Please check with your tax advisor or CPA before applying these provisions, so you can be sure there have not been adjustments or changes for the year you file your taxes.
The extra provisions for the ordained minster could prove to be very beneficial in stretching their retirement dollars.