How is a 403(b) Different From a 401(k)?

403(b)s are essentially the same as 401(k)s but there are a few notable differences.

A 403(b) is extremely similar to a 401(k); the main difference is the type of employer than can offer each. 403(b)s are offered by public educational institutions, non-profit hospitals, non-profit organizations, religious groups and some government organizations.

Due to the negotiating powers of many of those institutions, and their non-profit status, the administrative fees are smaller and they are not subject to some of the administrative oversight imposed on 401(k)s. Most 403(b)s are not subject to ERISA, which means they don’t have to satisfy as many auditing and reporting requirements.

In a lot of cases, employers won’t contribute anything to the 403(b), which makes administration of the account much simpler. In the cases where the employer does contribute, the money is usually vested immediately or over a much shorter period of time than in 401(k) accounts.

In non-ERISA plans, the employer cannot play a discretionary role with regard to an employee’s use of funds, so the administrative decisions about loans, withdrawals and distributions are left with the custodian companies or a third party administrator hired by them.

The only other real difference is that 403(b) have an additional catch-up provision called the Fifteen Year Cap Extension Option. If an employee has worked at the employer for over 15 years and has made contributions which average less than $5,000 a year, they have the option to contribute an additional $3,000 a year up to a lifetime maximum of $15,000.

This is in addition to the normal contribution limits and catch up provisions, the same ones that exist in 401(k)s. 403(b)s also have historically been able to accommodate multiple vendors within the same plan.

The industry is moving away from this with the increasing availability of open-architecture plans that can offer more value than a multiple-vendor plan. The IRS is gradually consolidating requirements for 403(b)s with those of 401(k)s, it seems, so there may be fewer differences between them in the future.