What Is a 403(a) Qualified Annuity Plan?
A 403(a) plan provides a structured retirement savings option for specific non-profit and education employees, funded exclusively through annuity contracts.
A 403(a) plan provides a structured retirement savings option for specific non-profit and education employees, funded exclusively through annuity contracts.
A 403(a) qualified annuity plan, defined under Section 403(a) of the Internal Revenue Code, is a tax-advantaged retirement plan purchased by an employer for an employee. These plans allow employees to accumulate funds on a tax-deferred basis, meaning taxes are not paid on contributions or their earnings until the money is withdrawn.
The structure of a 403(a) plan involves the employer purchasing annuity contracts from an insurance company to fund retirement benefits. While these plans share similarities with the more common 403(b) plans, their distinct operational and regulatory requirements set them apart.
These plans are available to public school systems, other public educational organizations, and 501(c)(3) organizations, which are typically charities and other non-profit entities.
For an employee to participate, they must meet the criteria set forth in the plan document, which includes requirements related to age and years of service. A 403(a) plan must adhere to the same nondiscrimination and coverage rules that apply to 401(a) qualified plans, as outlined in Section 404 of the Internal Revenue Code. These rules are designed to ensure the plan does not unfairly favor highly compensated employees.
This requirement for rigorous testing is a reason why 403(a) plans are less common than their 403(b) counterparts. The administrative burden of ensuring compliance with the qualified plan rules makes the 403(a) a more structured and complex option for employers.
Funding for a 403(a) plan comes from both employee and employer contributions, each governed by specific Internal Revenue Service (IRS) limits. Employees can contribute through elective deferrals by redirecting a portion of their salary into the plan on a pre-tax basis. For 2024, the maximum amount an employee can defer is $23,000.
Individuals aged 50 or over are permitted to make catch-up contributions. For 2024, the catch-up contribution limit is $7,500, meaning an eligible employee can contribute a total of $30,500.
Employers can also contribute to an employee’s account. These contributions can be structured as matching contributions, where the employer matches a percentage of the employee’s deferrals, or as nonelective contributions, which are made regardless of whether the employee contributes.
Both employee and employer contributions are subject to an overall annual additions limit. The total contributions from all sources cannot exceed the lesser of 100% of the employee’s compensation or a specific dollar amount. For 2024, this overall limit is $69,000.
A defining characteristic of a 403(a) plan is that all contributed funds must be used to purchase annuity contracts from an insurance company. An annuity contract is a financial product that provides a stream of payments to an individual during retirement. This is a distinction from 403(b) plans, which have the additional flexibility of using custodial accounts invested in mutual funds.
Like other employer-sponsored retirement plans, 403(a) plans are subject to vesting rules for employer contributions. Vesting determines when an employee has full ownership of the funds contributed by the employer. An employee’s own elective deferrals are always 100% vested immediately.
Common vesting schedules include a “cliff” or a “graded” schedule. Under a three-year cliff vesting schedule, an employee becomes 100% vested in all employer contributions after completing three years of service. A graded schedule, such as a two-to-six-year schedule, grants the employee partial ownership incrementally, increasing to 100% after six years.
Distributions from a 403(a) plan are taxed as ordinary income in the year they are received. The tax treatment is governed by the rules in Section 72 of the Internal Revenue Code.
Distributions taken before age 59½ are subject to a 10% additional tax, often referred to as an early withdrawal penalty. Exceptions to this penalty include distributions made to a beneficiary after the employee’s death, distributions attributable to the employee becoming totally and permanently disabled, or payments made as part of a series of substantially equal periodic payments.
Participants are also subject to Required Minimum Distribution (RMD) rules, which mandate that individuals must begin taking distributions by a certain age. The SECURE 2.0 Act of 2022 set this age at 73 for individuals who reach age 72 after December 31, 2022.
Funds from a 403(a) plan can be moved to other retirement accounts through a rollover. This can be done via a direct rollover between financial institutions or an indirect rollover, where the participant has 60 days to deposit the funds. A participant can roll over a distribution into another eligible plan, such as: