401(k) vs. 403(b) – What’s the Difference?

401(k) vs 403 (b) sign on the piece of paper.

The most well-known retirement plans offered by employers are 401(k) and 403(b) plans. In general, these plans have a lot in common, however, there are a few distinct differences between a 401k vs. 403b that can determine which is the right plan for your business. The main difference is that 401(k) plans are offered by private, for-profit businesses, and 403(b) plans are typically offered by non-profit or government organizations.

What’s a 401k?

A 401(k) is a retirement plan set up by a for-profit employer that allows employees to save in a tax-sheltered way. A 401(k) plan can offer multiple investment opportunities, including mutual funds, annuities, stocks, ETFs, and bonds.

Employers can match contributions up to a certain amount per year. ERISA guidelines limit how much the employees can contribute. For 2023, the maximum you can contribute is $22,500. If you are 50 or older, you are eligible for catchup contributions of an additional $7,500 per year, in 2023.

A 401(k) retirement plan allows for features that are customizable. All 401(k) plans are subject to nondiscrimination testing which may lead to higher administrative costs. Other costly responsibilities for a 401(k) may include set-up costs, payroll integrations, employee matches, per-participants fees, and various compliance tasks.

One way to help lower costs and simplify administration of a 401(k) is by offering a safe harbor match. Offering this match eliminates the requirement for discrimination testing. A retirement plan provider can customize the plan to include a safe harbor match.

Another customization option for a 401(k) plan is to offer a tax-savings feature called profit-sharing. A profit-sharing plan is a defined contribution plan where contributions are only made by the employer. There are unique and attractive benefits to offering profit-sharing for both the employer and employee. An advisor can help educate employers on regulations and benefits of profit-sharing.

Types of 401(k)s

There are several different 401(k) retirement plans. Here is a list of a few of the more common ones below.

Traditional 401(k) – most common plan that gives employees a choice of investment options, tax-deferred, employer has the option to offer a match
Roth 401(k) – an account funded with post-tax money, withdrawals are tax-free with the exception of the employer match funds
SIMPLE 401(k) – offered by small businesses with 100 or fewer employees
Solo 401(k) – designed for self-employed business owners, who have no employees (spouses who earn income from the business may also participate in a solo 401(k) plan)
Safe Harbor 401(k) – requires the company to make contributions to plan participants through a match or non-elective contribution

What’s a 403b?

A 403(b) retirement plan is only available to tax-exempt 501(c)(3) non-profits, government employers, schools, hospitals, and certain religious organizations. Typical participants of these plans may include teachers, nurses, doctors, government employees, clergy and a variety of other positions. A 403(b) plan can include pre-tax or Roth contributions. 403(b) investment options are limited to mutual funds and annuities.

One advantage to a 403(b) is universal eligibility for all employees, this makes administrative testing easier. One exception to this rule is if an employer has a 403(b) plan that offers a match for their employees, then the employer is required to follow the ERISA regulations.

A 403(b) plan has the same general contribution limits as a 401(k), but also has the perk of additional contribution opportunities for employees who have worked for a qualified organization for 15 years or more. Qualifying employees can contribute up to $3000 in additional funds per year, up to five years over the federal maximum.

Types of 403(b)s

There are a variety of 403(b) retirement plan options. Below is a list of the more common plans offered.

Traditional 403(b) – tax-deferred (earnings are taxed when withdrawn)
Roth 403(b) –employee contributes to plan after taxes have been taken out of their wages (savings and earnings are withdrawn tax-free)
403(b)(7) – type of 403(b) plan commonly offered to educational employees
403(b)(9) – type of 403(b) plan commonly offered to church organizations

401k vs. 403b: Which is better?

401(k) and 403(b) plans have a lot of similarities, but one isn’t better than the other. Both plans are tax-advantaged, employer-sponsored retirement plans. Whether participants have a 403(b) or 401(k), each plan will have penalties on early distributions. If a participant chooses to withdrawal before the age of 59 ½ years, they will pay a 10% early withdrawal penalty.

Business structure will likely be the determining factor if debating between a 401(k) vs. 403(b).

Find the Right Plan for Your Business

Retirement Plan Consultants (RPC) is a retirement plan provider working with fee-based advisors to offer customized 401(k) and 403(b) plans. RPC offers diversified retirement portfolios and provides resources to employers and employees to ensure a successful path to retirement.

Leann