What Is a 403c Plan and How Does It Work?

A 403(c) plan is a retirement savings vehicle available to employees of specific organizations, such as public schools, certain non-profits, and religious institutions. It functions similarly to other employer-sponsored retirement plans by allowing employees to contribute a portion of their salary to an individual account, where the funds can grow over time. These plans are formally known as tax-sheltered annuity (TSA) plans.

Contributions are made through automatic payroll deductions, and the funds are invested. The tax treatment of these contributions and their subsequent earnings is a defining characteristic of the plan, providing advantages for long-term saving.

Key Features of a 403c Plan

Eligibility for a 403(c) plan is restricted to employees of specific types of employers. This includes public education institutions like elementary schools, high schools, colleges, and universities. Employees of tax-exempt organizations under Internal Revenue Code Section 501(c)(3) also qualify, which encompasses a wide range of charitable, religious, and non-profit organizations. Certain ministers may also be eligible.

Historically, the primary investment vehicle within 403(c) plans was an annuity contract issued by an insurance company. While annuities remain a common option, investment choices have expanded. Most 403(c) plans also offer custodial accounts that hold mutual funds, giving employees access to a diversified portfolio of stocks and bonds.

Most plans offer a traditional, pre-tax contribution option. With this choice, employee contributions are deducted from their pay before federal and state income taxes are calculated, which lowers their current taxable income. The investments grow tax-deferred, meaning no taxes are paid on earnings until the money is withdrawn.

Many plans also provide a Roth contribution option. When an employee chooses this, contributions are made with after-tax dollars, so there is no immediate tax deduction, but qualified withdrawals in retirement are completely tax-free.

Contribution Limits and Rules

The Internal Revenue Service (IRS) sets annual limits on the amount an employee can contribute to their 403(c) plan through elective deferrals. This limit applies to the total contributions made to all similar retirement plans in the same year. For 2025, the general elective deferral limit is $23,500.

Participants who are age 50 or over can make additional catch-up contributions. For 2025, this additional contribution is $7,500.

Beginning in 2025, a new provision allows certain participants to make even larger catch-up contributions. If an employer’s plan adopts this option, participants who are ages 60, 61, 62, and 63 can contribute up to $11,250.

Some 403(c) plans also feature a special catch-up contribution for employees with 15 or more years of service with their current employer. This rule allows eligible employees to contribute up to an additional $3,000 per year, with a lifetime maximum of $15,000, but eligibility depends on a complex calculation involving prior years’ contributions.

Rules for Withdrawals and Distributions

The standard age for taking distributions from a 403(c) plan without a penalty is 59½. Once a participant reaches this age, they can withdraw funds and will only owe ordinary income tax on the pre-tax portion of the withdrawal. Roth 403(c) distributions are tax-free, provided the account has been open for at least five years.

Withdrawing money before reaching age 59½ results in a 10% early withdrawal penalty from the IRS, in addition to regular income tax. There are several exceptions to this penalty:

• Distributions made to a beneficiary after the participant’s death
• Withdrawals due to a total and permanent disability
• Distributions taken after separating from service with the employer in or after the year the employee turns 55
• Withdrawals for certain medical expenses or qualified domestic relations orders

Hardship withdrawals are permitted under strict circumstances for an “immediate and heavy financial need,” and the withdrawal cannot exceed the amount necessary to satisfy that need. Acceptable reasons include costs for medical care, the purchase of a principal residence, tuition fees, and payments to prevent eviction.

Many 403(c) plans allow participants to take out loans against their account balance. An employee can borrow up to 50% of their vested account balance, not to exceed $50,000, and must repay it with interest.

The IRS mandates that participants begin taking Required Minimum Distributions (RMDs) from their 403(c) plans once they reach age 73. Failing to take the full RMD amount can result in a significant tax penalty.

Rollover and Transfer Options

When an employee leaves their job or retires, they have several options for managing the funds in their 403(c) account. A direct rollover is a common method where the financial institution holding the 403(c) funds sends the money directly to the custodian of the new retirement account, such as an Individual Retirement Arrangement (IRA) or a new employer’s plan. No taxes are withheld, and the money remains in a tax-advantaged status.

With an indirect rollover, the employee receives a check for their account’s value, minus a mandatory 20% federal income tax withholding. The employee then has 60 days to deposit the full amount of the original distribution into another eligible retirement account. To avoid taxes and penalties, the employee must use their own funds to make up for the 20% that was withheld.

The funds from a traditional, pre-tax 403(c) can be rolled over into a traditional IRA or a new employer’s 401(k) or 403(c) plan, provided the new plan accepts rollovers. This flexibility allows individuals to consolidate their retirement savings. Funds held in a Roth 403(c) account can be rolled over into a Roth IRA or another employer’s designated Roth account.

A plan-to-plan transfer is different from a rollover. A transfer occurs when an employee remains with the same employer but wants to switch their 403(c) investments from one approved vendor to another under the same employer’s plan.