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Congressional Research Service
Informing the IegisIative debate since 1914
October 24, 2023
403(b) Pension Plans: Overview and Legislative Developments
Introduction
A pension is a benefit employers may offer to assist
employees in preparing for retirement. Pension plans may
be sponsored by private sector (nonprofit and for-profit)
employers or public (governmental) employers and may be
classified according to whether they are (1) defined benefit
(DB) or defined contribution (DC) plans and (2) sponsored
by one employer or more than one employer. In DB plans,
participants (or their beneficiaries) typically receive regular,
monthly benefit payments in retirement (which some refer
to as a traditional pension). In DC plans, participants
have individual accounts that can provide a source of
income in retirement.
Two common type of DC plans are 401(k) plans and 403(b)
plans (named for the corresponding sections of the Internal
Revenue Code [IRC; Title 26 of the U.S. Code]). A 401(k)
plan is a type of DC plan available to private sector
employers. A 403(b) plan (which may be called a tax-
sheltered annuity plan) is a type of DC plan sponsored by
public educational organizations (including public primary
and secondary schools, state colleges and universities, and
public junior colleges), 501(c)(3) tax-exempt entities, and
employers that provide retirement income accounts for
ministers (e.g., churches). While many 403(b) plans are
sponsored by single employers, recent legislative changes
may increase the number of those sponsored by more than
one employer.
Despite distinct legislative histories, there has been a move
toward harmonizing rules for 401(k) and 403(b) plans. This
In Focus provides background on 403(b) plans, highlights
areas in which they differ from 401(k) plans, and discusses
current legislative developments surrounding 403(b) plans.
403(b) Plans an d Federal Pension Law
Pension plans are generally tax qualified, which means that
plan sponsors and participants receive certain tax
advantages provided they meet IRC requirements. Some
provisions of the IRC apply to both private and public
sector plans, while some apply to one or the other. Nearly
all private sector pension plans are governed by the
Employee Retirement Income Security Act of 1974
(ERISA; P.L. 93-406), which is enforced by the
Department of the Treasury, the Department of Labor
(DOL), and the Pension Benefit Guaranty Corporation
(PBGC). ERISA was enacted to protect the interests of
pension plan participants and beneficiaries. ERISA sets
standards that private sector pension plans must follow,
including with regard to participation, funding, and
fiduciary responsibility (standards that govern how
individuals with authority over pension plans must behave).
Whether a 403(b) plan is subject to ERISA depends on its
sponsoring employer and/or the degree of employer
involvement in the plan. Plans sponsored by private sector,
tax-exempt 501(c)(3) entities are subject to ERISA except
for those that meet a safe harbor exemption in which the
employer's role is limited (see 29 C.F.R. §2510.3-2(f) and
DOL's Field Assistance Bulletin 2007-02). Among other
provisions, the safe harbor specifies that employers may not
contribute to the plan and employee participation must be
voluntary (i.e., no automatic enrollment features).
Plans sponsored by public educational organizations and
churches are exempt from ERISA. However, church plans
may elect ERISA coverage.
ERISA 403(b) plans submit annual Form 5500 filings with
DOL, PBGC, and the Internal Revenue Service (IRS). Form
5500 includes data on the number of plan participants,
financial information about the plan, and details of
companies providing services to the plan. In plan year 2020
(the most recent Form 5500 data available), DOL indicated
that there were 20,732 private sector 403(b) plans with 9.6
million participants. The U.S. Government Accountability
Office estimated that in 2019, ERISA 403(b) plan assets
comprised 57% of all 403(b) plan assets.
Structure of 403(b) Plans
Section 403(b) of the IRC permits tree categories of
funding arrangements: (1) annuity contracts provided by an
insurance company, (2) custodial accounts invested only in
Securities and Exchange Commission-registered mutual
funds, or (3) retirement income accounts for church
employees described in Section 403(b)(9) of the IRC
(which are treated as annuity contracts). Retirement income
accounts do not have investment restrictions.
Employers have varying degrees of involvement in their
403(b) plans-ranging from minimal involvement, such as
providing a list of insurance carriers to eligible employees
(common in 403(b) plans sponsored by K-12 school
districts), to greater involvement, such as choosing
investment options and providing an employer match.
Starting in 2009, IRS regulations required that 403(b)
plans-both ERISA and non-ERISA-be maintained
pursuant to written plan documents (with some exceptions
for certain church plans).
Features of 403(b) Plans
The following summarizes information on 403(b) plans,
noting comparisons with 401(k) plans where relevant.
Enrollment. ERISA 403(b) plans may include automatic
(auto) enrollment features, in which employees are, by
default, enrolled in the plan but can opt out. As a condition
of the safe harbor exemption, private sector 403(b) plans
that are not subject to ERISA are not permitted to auto
enroll participants. In addition, some states (via state law)
do not permit non-ERISA 403(b) plans to auto enroll. A](ViewImageLocal?handle=hein.crs/govengf0001&div=1&collection=&method=preview&ext=.png&size=3)