403(b) Plans for Nonprofit and School Workers

If you teach in a public school, work at a hospital, or staff a §501(c)(3) charity, your retirement plan is probably a 403(b), not a 401(k). The two plans look identical on the surface and they share most limits — but the differences matter.

Who can sponsor a 403(b)

IRC §403(b) is limited to three employer types:

• Public school systems and state colleges (including the staff of the U.S. Department of Defense schools).
• §501(c)(3) charities — hospitals, universities, museums, churches, religious orders.
• Certain ministers, including self-employed clergy treated as employees under §414(e)(5).

For-profit employers cannot sponsor a 403(b). When a for-profit acquires a nonprofit, plan-termination and merger rules under Rev. Rul. 2011-7 apply.

2025 contribution limits

• Employee elective deferral: $23,500 (same as 401(k); IRC §402(g) is the shared cap)
• Age-50 catch-up: +$7,500
• SECURE 2.0 super catch-up (ages 60–63): +$11,250 instead of $7,500
• Total annual additions: $70,000 under IRC §415(c)

The 15-year service catch-up

Unique to 403(b), IRC §402(g)(7) allows employees of public schools, hospitals, and certain charities with at least 15 years of service to defer an additional $3,000 per year, up to a $15,000 lifetime cap. The 15-year catch-up stacks with the age-50 catch-up but reduces it dollar-for-dollar over time.

Investment options: annuities and custodial accounts

Historically 403(b) plans were limited to fixed and variable annuity contracts under §403(b)(1). Custodial accounts holding mutual funds under §403(b)(7) were added in 1974, and most modern plans now offer mutual-fund options. The legacy annuity-only plans are why so many teachers' 403(b)s still carry 1.5%+ annual expense ratios — a major drag on outcomes. Check your plan's vendor list and the expense ratios before defaulting to the first option offered.

Nondiscrimination testing

Church plans and governmental plans are exempt from ADP/ACP testing entirely. Charitable 403(b) plans are subject only to universal availability under §403(b)(12)(A)(ii) — meaning all eligible employees must have the opportunity to defer — but not to the ADP/ACP percentage tests. This is a real advantage over the 401(k), which is why nonprofit HCEs can routinely max out without the testing complications their corporate counterparts face.

Common mistakes

• Holding multiple 403(b)s without coordinating the §402(g) limit. The $23,500 elective deferral cap applies across all your 403(b)s and 401(k)s combined.
• Stacking a 401(k) job on top of a 403(b) job. Same coordination rule — your two W-2s, two plans, one $23,500 cap.
• Defaulting to the annuity option. A teacher who put $500/month into a 1.5%-expense annuity for 30 years instead of a 0.10% index fund gave up roughly $200,000 of ending wealth at 7% gross returns.
• Forgetting that 457(b) stacks. Many school districts and government employers offer both a 403(b) and a 457(b). The two plans have separate $23,500 deferral limits — you can do both for a combined $47,000 of pre-tax savings.

Sources

• Internal Revenue Code §403(b), tax-sheltered annuities (Cornell LII): law.cornell.edu/uscode/text/26/403
• Internal Revenue Code §402(g)(7), 15-year-of-service catch-up: law.cornell.edu/uscode/text/26/402
• IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans): irs.gov/forms-pubs/about-publication-571
• Treasury Regulation §1.403(b)-1 through §1.403(b)-11: law.cornell.edu/cfr/text/26/1.403(b)-1
• U.S. Department of Labor, "403(b) Plans for Employees of Public Schools and Tax-Exempt Organizations": dol.gov/agencies/ebsa

RetirementCheck101 treats 403(b) just like 401(k) and surfaces the 457(b) stacking opportunity if your employer offers both. Explore the free educational tool.