What Is a 403(a) Plan and How Does It Work?

A 403(a) plan is a type of retirement savings vehicle designed to help eligible employees save for their future. This plan provides a structured way to accumulate funds for retirement, often with beneficial tax considerations. It serves as an employer-sponsored arrangement, facilitating long-term financial planning for those it covers.

Defining a 403(a) Plan

A 403(a) plan is a qualified retirement plan established by certain employers for their employees, operating under Internal Revenue Code Section 403(a). These plans are typically offered by governmental agencies, educational institutions, and non-profit organizations. Unlike 401(k) plans, 403(a) plans serve a distinct segment of the workforce, particularly those in public service or tax-exempt entities.

This type of plan functions as a defined contribution plan, with contributions made to individual employee accounts. The retirement benefit an employee receives is based on the total contributions made to their account, along with any investment gains or losses, minus administrative fees. Employers offering 403(a) plans generally maintain a significant degree of control over the plan’s structure, including eligibility requirements and contribution models. In many cases, employers may mandate enrollment for eligible employees to ensure participation and leverage tax incentives.

Employers are required to make contributions to their employees’ plans. This employer contribution is mandatory, even if the plan allows for optional employee contributions. The plan’s purpose is to provide a tax-advantaged method for eligible employees to save for retirement.

Contributions to a 403(a) Plan

Contributions to a 403(a) plan can originate from both the employee and the employer. Employees typically make contributions through elective deferrals, which are pre-tax amounts deducted directly from their paychecks. This payroll deduction reduces the employee’s current taxable income, providing an immediate tax benefit.

Employer contributions can take various forms, including matching contributions or profit-sharing contributions. The employer determines the structure and rate of these contributions. All employee elective deferrals are immediately 100% vested, meaning the employee has full ownership of these funds from the moment they are contributed.

For 2025, the IRS sets annual contribution limits for these plans. Employees can generally defer up to $23,500 into their 403(a) account. For participants aged 50 and older, an additional “catch-up” contribution is permitted, allowing them to contribute an extra $7,500, for a total of $31,000. A higher catch-up contribution of $11,250 applies for those aged 60, 61, 62, or 63 in 2025, potentially allowing a total of $34,750 for this age group.

The total annual additions to a participant’s account from both employee and employer contributions are also capped. For 2025, this limit is $70,000, or $77,500 if the participant is age 50 or older and includes catch-up contributions. While employee contributions are always immediately vested, employer contributions may be subject to a vesting schedule. This specifies when an employee gains full ownership of those funds. Common vesting schedules include cliff vesting, where ownership is granted all at once after a certain period, or graded vesting, where ownership gradually increases over several years.

Understanding 403(a) Distributions

Participants can begin taking penalty-free withdrawals once they reach age 59½. Withdrawals made before age 59½ are considered early distributions and are subject to a 10% early withdrawal penalty, in addition to regular income taxes.

Several exceptions can waive this 10% penalty:
Separation from service at or after age 55.
Total and permanent disability.
Withdrawals for unreimbursed medical expenses exceeding a certain percentage of adjusted gross income.
Payments made under a Qualified Domestic Relations Order (QDRO).
Distributions for qualified birth or adoption expenses.
An IRS levy on the account.

Participants are required to begin taking Required Minimum Distributions (RMDs) from their 403(a) plan. For those reaching age 73, RMDs must start by April 1 of the year following the year they turn 73. Subsequent RMDs must be taken by December 31 of each year. Failure to take timely RMDs can result in a 25% penalty, which is 25% of the amount that should have been withdrawn, though it can be reduced to 10% if corrected within two years.

Funds from a 403(a) plan can be rolled over to another qualified retirement plan, such as a 401(k), another 403(a), or an IRA. This process allows for a tax-free transfer of funds, maintaining their tax-deferred status. A direct rollover is recommended to avoid potential tax withholding and penalties.

Key Tax Aspects of 403(a) Plans

Contributions made to a traditional 403(a) plan are on a pre-tax basis. This reduces the employee’s current taxable income, resulting in immediate tax savings.

Earnings and investment growth within the 403(a) plan accrue on a tax-deferred basis. This allows investments to grow without annual income tax until funds are withdrawn in retirement. Tax deferral enhances the compounding effect of returns over time.

When distributions are taken from a 403(a) plan in retirement, they are taxed as ordinary income in the year received. This applies to both original pre-tax contributions and accumulated earnings. The individual’s ordinary income tax rate at the time of withdrawal applies.

Rollovers from a 403(a) plan to another qualified retirement account like an IRA or a 401(k) are tax-free events. This allows individuals to consolidate or move their retirement savings without triggering an immediate tax liability. However, if a pre-tax 403(a) plan is rolled into a Roth account, the transferred amount becomes taxable income in the year of the rollover, as Roth accounts are funded with after-tax dollars.