The federal government offers a lot of qualified retirement plans to its citizens through their employers right when they are serving on their jobs. The 403(b) and 401(k) are also qualified tax-advantaged retirement plans offered by many employers. Plan 403(b) and 401(k) are named after the same sections of the tax code, respectively.
Even though both of these plans come under the tax code; there are some differences when we discuss a 403(b) vs 401(k) plan. The key difference between the two plans is that both have different kinds of employers who sponsor the plan.
The 403(b) plan is available for the employees of government institutions or nonprofit organizations whereas the 401(k) plan is offered to profitable and private companies.
Another lethal difference between 401(k) and 403(b) plans is that both have entirely different investment options available for their users. Even though over time the investment options offered become less distinctive compared to the other ones; still it is one of the major differences at the time of inoculation.
403(b) plans were previously referred to as tax-sheltered annuities, they were plans which were strictly restricted by an annuity format but this restriction was removed in 1974.
To better understand the difference between the two plans, we have compared both in detail below.
A 403(b) plan is a conclusive retirement plan especially modified for employees of tax-exempted organizations, public schools, and ministers. These plans can be invested in both mutual funds or certain types of annuities. A 403(b) plan is also known as a tax-sheltered annuity plan and the distinctive features of 403(b) plans are quite similar to the features of 401(k) plans.
Employees of all the tax-exempted organizations can easily take part in this plan. The participants range widely; from teachers, professors, nurses, school administrators, librarians, and doctors to all the government employees. A 403(b) plan allows the employees to vest out the funds immediately or it can vest the funds for a shorter period.
A 401(k) plan is a qualified retirement plan which is solely employer-sponsored. It is offered to the employees who are eligible to make tax-deferent contributions from their wage or salary on a basis of either pretax or post-tax.
Employers who offer a 401(k) plan to their employees must make a non-elective contribution or a matching contribution to the plan on behalf of their prized employees; which may add a profit-sharing feature to the qualified retirement plan of 401(k).
When the employees withdraw funds from the 401(k) plan or “take distribution”, this is a perfect example of enjoying the income from the retirement days while still staying on the job. Most people consider the distribution of 401(k) plans as paychecks because the tax deduction is similar to that from the regular income. However, this tax deduction varies following the timing of your plan, which is at what moment and how much you plan to withdraw from your direct retirement fund.
403(b) vs 401(k) – legal differences
403(b) plans in no way comply with the regulations of the Employee Retirement Income Security Act (ERISA), which are mainly qualified by the government as these are tax-deferred retirement investment plans; which include both 403(b) and 401(k).
For instance, a 403(b) plan is exempted from any kind of nondiscrimination testing. It is normally conducted annually, as this test is mainly designed to prevent any managerial level compensation of some high-level employees; from receiving any kind of disproportionate amount of benefits from any given tax-deferent plan.
One of the main reasons for this exemption is the department of labor regulation, under which the 403(b) plans cannot act or flourish as they are labeled as employer-sponsored plans where the employer does not contribute to the fund.
On the contrary, if the employer does make contributions for the employee’s tax-deferred plans such as 403(b), then they are supposed to act under the guidelines of ERISA which are the same as the 401k plans.
The investment funds are majorly required to qualify as a registered investment company under the Securities and Exchange Act of 1940, to be included under the 403(b) plan banner. This does not imply the investment options of 401(k) plans.
403(b) vs 401(k) plans – the real differences
The 403(b) plans legally allow the employer to match with its participants’ contributions, but most of the time; the employers are unwilling to offer any such matches to save their ERISA exemption.
On the other hand, 401(k) plans do offer match programs but definitely at a higher rate. For instance, an employee who has a service tenure of over 15 years with any government firm or a nonprofit agency then they might be able to make any kind of additional contributions to the 403(b) plans, unlike the 401(k) plans which do not offer this option at all.
Another difference between the 401(k) and 403(b) plans is that the 403(b) plans are non-ERISA plans, meaning the expense ratios are much lower in it as they have very stringent requirements in terms of tax deduction.
The plan providers which in these cases are the employers and the administrators are different in these plans. The 401(k) plan is usually administered by the mutual fund companies, whereas the 403(b) plans are mostly administered by the insurance companies. This is the mere reason why the 403(b) plans limit the investment options and are largely dependent upon the annuities, whereas the 401(k) plans do offer mutual funds.
There are absolutely no comparison between 403(b) vs 401(k) plans as both are formulated to assist the employees after investment. These plans were conceived to aid the employees while they stayed on the job. Both are very similar qualified retirement plans. They do have the same contributions in terms of the basic amounts and the regulation as they both work under certain limitations; both offer the employee the Roth options yet they are different in so many ways, especially the turnout method. Lastly, all those who are planning to participate in either plan must be at least 59.5 during the time of application to be able to start taking the distributions.