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Tax-exempt organizations, such as non-profits, educational institutions, and religious entities, can help their employees save for retirement with a 403(b) or 401(k) plan. Choosing the right retirement plan can seem daunting. In truth, 403(b) and 401(k) plans are much more similar than different.
The summary below outlines the similarities and differences between 403(b) and 401(k) plans. Knowing these factors can help ensure you choose the best retirement plan for your tax-exempt organization.
Eligibility
Both 403(b) and 401(k) plans must include eligibility provisions. These provisions define when employees can join and/or receive employer contributions. In general, 401(k) plans have more flexible options.
|
Contribution |
403(b) Plan |
401(k) Plan |
|
Elective Deferrals (including pre-tax and Roth) |
403(b) plans cannot impose an age or service requirement on elective deferrals due to a “universal availability” requirement. With limited exceptions, all employees must be immediately eligible upon their hire date.
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Age requirement cannot exceed 21, while service requirement cannot exceed 1 year (12 months) in which the employee performs at least 1,000 hours of service.
Employee groups can be excluded if coverage testing can pass. |
|
Safe Harbor Contributions |
Age requirement cannot exceed 21, while service requirement cannot exceed 1 year (12 months) in which the employee performs at least 1,000 hours of service.
Employee groups can be excluded if coverage testing can pass. |
Must match elective deferrals for the plan to automatically satisfy the ADP nondiscrimination test and top heavy minimum requirements. |
|
Discretionary Matching or Nonelective Contributions |
Age requirement cannot exceed 21, while service requirement cannot exceed two years (24 months) in which the employee performs at least 1,000 hours of service.
Employee groups can be excluded if coverage testing can pass. |
Same |
Contributions
Both 403(b) and 401(k) plans can allow elective deferrals, safe harbor, matching, and nonelective contributions. Their amount is subject to identical annual limits. Here are the annual limits for 2025:
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Contribution |
Annual Limit |
|
Elective Deferrals (including pre-tax and Roth) |
$23,500 |
|
Catch-Up Contributions (for participants age 50 & over) |
$7,500 |
|
(including elective deferrals, match, nonelective contributions, etc.) |
$70,000 |
There’s an exception. 403(b) plans can allow employees who have completed at least 15 years of service with the organization to make a special catch-up contribution. The limit for the special catch-up is the lesser of:
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- $3,000;
- $15,000, reduced by special 403(b) catch-up made in past years; or
- $5,000, multiplied by the employee's years of service with the employer, less all elective deferrals made by the employee in prior years to the organization's plans.
In our experience, these catch-up contributions are rare due to their administrative complexity.
Annual Testing
Both 403(b) and 401(k)plans are subject to annual testing to ensure business owners and other Highly Compensated Employees (HCEs) do not disproportionately benefit. 403(b) and 401(k) plans have many tests in common, but there are ones that only apply to 401(k) plans.
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Test |
403(b) Plan |
401(k) Plan |
|
Yes |
Yes |
|
|
No |
Yes* |
|
|
Yes* |
Yes* |
|
|
Yes |
Yes |
|
|
No |
Yes* |
*A safe harbor plan can automatically pass this test by meeting certain contribution and participant notice requirements.
Distributions
403(b) or 401(k) plans are subject to similar distribution rules. In general, participants can withdraw their account from either plan upon one of the following events:
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- Termination of employment
- Death
- Disability
- Plan termination
403(b) or 401(k) plans can also allow participants to take an “in-service” distribution while employed upon certain events. Common events include:
-
- Attainment of age 59 ½
- Hardship
SECURE 2.0 created new in-service distribution options. These new options are available for both 403(b) and 401(k) plans.
Investments
In general, 401(k) plans can allow just about any investment authorized by plan fiduciaries. In contrast, 403(b) plans are generally limited to mutual funds or annuity contracts. 403(b) plans cannot allow individual stocks, bonds, or collective investment trusts (CITs) for this reason.
Which Is the Right One for Your Tax-Exempt?
It’s tough to go wrong with either a 403(b) or 401(k) plan, but their differences may make one a better fit for a tax-exempt organization than the other. For example, if you employ at least one HCE and won’t make any employer contributions, a 403(b) plan may be the best fit due to no ADP nondiscrimination testing requirement for elective deferrals.
Still unsure about the best plan for your tax-exempt organization? Talk to a professional retirement plan provider. A good one will make the best fit clear.