Erisa Rules For 403b In Montgomery
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Every 401(k) plan, other than “SIMPLE” plans, “Safe Harbor” plans or “Qualified Automatic Contribution Arrangements,” requires an annual test to prevent discrimination in favor of the group of employees referred to as “highly compensated employees” (HCEs).
But the plans have some major differences, too. For one, only an employer can set up a 403(b) plan, which it then offers to its workers. An IRA is set up by an individual for their own use.
One key exception is the ADP test that normally applies to salary deferrals. As a trade-off to the universal availability requirement (described above), 403(b) plans are not required to pass the ADP test. This allows any highly compensated employees to maximize their deferrals.
Section 401(k)(3)(F) allows an employer to exclude from the ADP test NHCEs “who have not met the minimum age and service requirements of section 410(a)(1)(A)” if the employer applies IRC Section 410(b)(4)(B) in determining whether the plan meets the coverage requirements of IRC Section 410(b)(1).
Your 403(b) plan doesn't limit the total employer and employee contributions to not exceed the IRC Section 415(c) limits. Determine types of contributions allowed in the plan and total employee and employer contributions per participant.
These nondiscrimination tests for 401(k) plans are called the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests. The ADP test counts elective deferrals (both pre-tax and Roth deferrals, but not catch-up contributions) of the HCEs and NHCEs.
Although they do not require ADP testing, 403(b) plans that provide matching contributions must typically conduct actual contribution percentage (ACP) testing. By comparing the average percentage of employer contributions between HCEs and NHCEs, the ACP test aims to prevent any disproportionate benefits.
For 2025, the 403(b) contribution limit is $23,500 for employee contributions, and $70,000 for the combined employee and employer contributions. If you're age 50 to 59 or 64 and older, you're eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $31,000.
403(b) plans and 401(k) plans are very similar but with one key difference: whom they're offered to. While 401(k) plans are primarily offered to employees in for-profit companies, 403(b) plans are offered to not-for-profit organizations and government employees.
