403(b) Tax-Sheltered Annuities for

Sponsors

A 403(b) plan is a retirement plan offered by a public school or 501(c)(3) tax-exempt 

organization for its employees. An employee can only obtain a 403(b) annuity or custodial 

account* under an employer’s 403(b) plan. These annuities and custodial accounts are 

funded by employee elective deferrals made under salary reduction agreements, employer 

contributions or a combination of both.

Read on to learn about:

 Common 403(b) plan mistakes, and 

 IRS products (including the 403(b) Fix-It Guide), services and assistance to help you keep 

your 403(b) plan healthy.

Be aware of common mistakes.

As a 403(b) plan sponsor, it’s important to know the tax rules that apply to your 403(b) plan 

and to pay attention to the operation of your plan so you can:

 maximize your employees’ retirement benefits,

 comply with the law, and

 avoid additional taxes and penalties.

*Unless otherwise stated, references to 403(b) annuities in this publication will generally also apply to 403(b) 

custodial accounts. 
403(b) Plan

Common Mistakes

The IRS commonly finds mistakes in 403(b) plans in these areas:

Written plan requirement. You must have a written plan that describes the way the plan will work, 

and you must operate your plan accordingly. Plan sponsors must have adopted a written plan by 

December 31, 2009, that complies in good faith with Internal Revenue Code Section 403(b).

A 403(b) plan doesn’t need to be a single plan document. For example, you may compile the salary 

reduction agreements, the contracts that fund the plan, and written procedures for eligibility, benefits, 

dollar limitations, nondiscrimination and universal availability. However, a single plan document makes 

administration easier, especially if your plan has multiple vendors.

Ineligible employer. Generally, only public schools and 501(c)(3) tax-exempt organizations may 

sponsor a 403(b) plan.

Universal availability. If you allow one employee to make elective deferrals, you must allow all 

eligible employees to make them. You may exclude certain groups of employees, such as those 

normally working fewer than 20 hours per week (less than 1,000 hours per year), students performing 

certain services, employees who are eligible for elective deferrals under another plan you sponsor 

and non-resident aliens. You must notify employees of their eligibility to make an initial or change an 

existing deferral election at least once a year.

Depositing elective deferrals. You must send your employees’ deferrals to their annuity providers 

as soon as is reasonable for proper plan administration (but no later than 15 days following the month of 

the pay date). If your plan provides an earlier time for transferring elective deferrals, you must follow it.

Excess elective deferrals. The general limit on employee elective deferrals is $19,500 (in 2021, 

indexed for inflation). If the plan allows, eligible employees may also make catch-up contributions.

 15-years-of-service catch-up contribution

 available for certain employers (such as schools, hospitals and churches)

 employee must have 15 years of service

 limited to least of:

 $3,000,

 $15,000 less previously excluded special catch-ups, or

 $5,000 multiplied by years of service minus previously excluded deferrals

 Age-50 catch-up contribution

 additional $6,500 (in 2021, indexed for inflation) 

Catch-up contributions must be applied to the 15-years-of-service catch-up (if available) before being 

applied to the age-50 catch-up. See 403(b) Contribution Limits for examples of how the ordering 

works.
You must distribute excess deferrals plus earnings to employees no later than April 15 of the following 

taxable year to avoid additional taxes and penalties for the employee and employer. If you don’t timely 

correct excess deferrals, then you’ll underreport your employees’ taxable wages on your employment 

tax return. You’ll likely withhold too few taxes from your employees’ wages, and you’ll be responsible 

for the underpayment and penalties.

Employer and employee contributions. The limit on total employer and employee contributions is 

$58,000 (for 2021, indexed for inflation). The 15-years-of-service catch-up is included in this limit, but 

the age-50 catch-up isn’t. Therefore, the limit for employees who are at least age 50 is up to $64,500 

for 2021.

Loans. Loans that don’t meet the tax rules may be deemed a taxable distribution that’s reported to 

the employee as income. This can happen when required loan payments are missed or loans exceed 

the allowed limit, often due to loans from multiple vendors.

Hardship distributions. Hardship distributions are considered early distributions if: 

 you didn’t get adequate documentation of the financial need,

 the employee didn’t use other reasonably available financial means, or

 distributions from all vendors exceed the amount of the hardship.

Post-severance contributions. Plans may allow for elective deferrals and employer contributions 

after an employee separates from service.

 Elective deferrals. Employees may generally defer—up to their annual limits—their unpaid regular 

pay and unused vacation and sick pay if paid before the end of the limitation year they left your 

employment, or 21⁄2 months from the date of severance, if later.

 Employer contributions. You may contribute up to the annual limit to a former employee’s 

account for up to five years following the end of the year they left your employment. (Note: The 

former employee can’t elect to receive this money in cash instead of depositing it to their 403(b) 

account.) All contributions must end upon the employee’s death.

In-service exchanges and transfers.

 In-service contract exchanges take place within the same plan. The 403(b) plan must permit the 

movement of the funds and you must follow the plan terms. Benefits can’t be reduced and the 

moved funds must have at least the same distribution restrictions. You and the receiving annuity 

issuer must agree to share certain information needed for plan administration.

 Plan transfers take place between two 403(b) plans. Both plans must permit the movement of 

the funds. In addition, the participant must be a current or former employee of the receiving plan 

sponsor. Benefits can’t be reduced and the moved funds must be subject to at least the same 

distribution restrictions.

If you find a mistake in your 403(b) plan, take steps to bring it into compliance so your employees can 

continue to save for retirement on a tax-favored basis. You need to timely correct plan mistakes to 

avoid additional taxes and penalties that may affect you and your employees. Consider contacting a 

tax professional for help. You can correct most 403(b) plan mistakes using IRS correction programs. 

See Correcting Plan Errors for additional information.
To Learn More...

The following publications cover 403(b) plans, other retirement plans and IRS 

correction programs:

 Publication 15, (Circular E), Employer’s Tax Guide

 Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and 

Certain Tax-Exempt Organizations

 Publication 575, Pension and Annuity Income

 Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)

 Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)

 Publication 4224, Retirement Plan Correction Programs

 Publication 4482, 403(b) Tax-Sheltered Annuities for Participants

 Publication 4484, Choose a Retirement Plan

 Publication 4546, 403(b) Plan Checklist 

Visit www.irs.gov/retirement for online resources covering retirement plans 

(including 403(b) plans). This site has tools such as:

 the 403(b) Plan Fix-It Guide,

 answers to frequently asked questions, and

 a page devoted to correction programs to assist you in correcting errors if you discover them in 

the operation of your plan.

Publication 4483 (Rev. 8-2021) Catalog Number 47243V Department of the Treasury Internal Revenue Service www.irs.gov