403(b)

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A 403(b) plan is a tax advantaged retirement savings plan available for non-profit employers in the United States. It has tax treatment extremely similar to a 401(k) plan, especially after the Economic Growth and Tax Relief Reconciliation Act of 2001. Simply put, employee salary deferrals into a 403(b) plan are made before income tax is paid on it, and allowed to grow tax deferred until the money is taxed as income when taken out of the plan.

403(b) plans are not technically "qualified" plans under the US IRS code, but have the same general appearance as other qualified plans. However, they are very different in some fundamental ways. To the participant, the plan appears almost exactly the same and the options available are very similar. The only important differences for the participant are some additional ways that they can withdraw money before the typical 59 1/2 age restriction. From a plan administration standpoint, 403(b) plans do not have many of the same technical difficulties that 401(k)'s do, such as discrimination testing, especially if the plan is not an ERISA plan. If the plan is an ERISA plan (the employer makes contributions to employee accounts), there are additional restrictions and administrative issues.

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ERISA plans have bankruptcy protection

If the 403(b) is not an ERISA plan it is not accorded protected status as property that could be claimed as exempt by the debtor under the U.S. Bankruptcy Code. In In re Barnes, 264 B.R. 415 (Bankr. E.D. Mich. 2001) Judge Spector held that the fixed income annuity was not such a trust and could be reached by creditors. The variable account was, by judicial stretching, held to fall within 541(c)(2) and thus protected.

For this reason, having an ERISA anti-alienation clause is protective of pensions, giving these pensions the same protection as a spendthrift trust. Some critics argue that this is disparate treatment of similar pension schemes and that more consistent protection is called for.

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