403(b) retirement plans

You can’t pursue your mission if your team is running on empty. Financial stress is quietly draining productivity, morale and retention across the nonprofit and public sectors, and employees are looking to their employers for real solutions.

For schools, hospitals and tax-exempt organizations, the 403(b) retirement plan is one of the most effective ways to help. It allows employees to invest in their future through flexible, tax-advantaged savings. It also helps employers offer meaningful support without stretching already-tight budgets.

What is a 403(b)?

A 403(b) plan is a tax-advantaged retirement savings program designed specifically for employees of nonprofits, public schools, churches and other tax-exempt organizations. It allows eligible workers to contribute a portion of their paycheck into a retirement account, often with pretax dollars and the benefit of tax-deferred growth.

While 403(b) plans share many features with 401(k)s – such as contribution limits, catch-up options, and investment choices – they serve different employers. Established under Section 403(b) of the Internal Revenue Code, these plans were created to help workers in mission-focused roles save for the future without relying solely on pensions or Social Security.

Organizations that offer a 403(b) often include school districts, universities, hospitals, religious institutions and 501(c)(3) nonprofits. In these workplaces, employees give a great deal of themselves. A retirement plan offers something meaningful in return – a structured way to prepare for the future, supported by the employer.

For employers, the impact goes beyond benefits administration. Providing a 403(b) retirement plan reflects a long-term investment in employees and builds trust across organizations. It strengthens recruitment, retention and reputation as a workplace that values the well-being of the people behind the mission.

How does a 403(b) work?

A 403(b) plan gives employees a simple, consistent way to save for the future. Contributions are made directly from each paycheck, and the funds can increase over time with the help of investment growth and earnings. Employers can enhance the plan with matching contributions, automation and educational resources that make the experience more accessible and meaningful.

Here’s a closer look at the key components that shape how a 403(b) works and how to get the most out of it:

Automation

Many 403(b) plans now include automatic enrollment¹, which adds eligible employees to the plan unless they opt out. Some also include auto-escalation, which gradually increases contributions over time. These features reduce decision fatigue, improve participation and help employees save more consistently.

Automation benefits employers, too. It supports any required nondiscrimination testing, minimizes manual data entry and aligns with best practices for plan design. The result is fewer errors, smoother onboarding and more time for HR teams to focus on strategy, not paperwork. Employees also gain access to education modules that help them understand how and why to save.

Employer contributions

While employer contributions aren’t required in a 403(b), they can be a powerful incentive. Whether through matching or non-elective contributions, these additions show employees that their employer is invested in their long-term financial well-being. Common examples include a dollar-for-dollar match on the first 3% of pay plus 50% on the next 2%, or a flat 3% non-elective contribution to all eligible employees, regardless of participation.

In addition, both salary deferrals and employer contributions can be made as Roth contributions. This feature gives employees greater control over their tax strategy and future withdrawals.

Investment growth

Small, consistent contributions to a 403(b) can lead to significant growth. For example, contributing $100 per month for 20 years at a 6% average return can grow to more than $46,000. And the earlier employees start, the more time their money has to work for them. That’s why automatic enrollment and education matter so much – they help turn saving into a habit.

Catch-up contributions

Some employees start saving later in their careers. Catch-up contributions give them a way to close the gap.

As of 2025, employees aged 50 or older can contribute an additional $7,500 ($11,250 for those between the ages of 60 and 63) beyond the standard limit. Many 403(b) plans also allow for the 15-year rule, which may allow long-term employees with 15 or more years of service to contribute up to an extra $3,000 per year, depending on plan provisions.

These options are especially helpful for those who took time out of the workforce, changed careers or faced early financial challenges. With the right plan design and communication, employers can help every employee make up ground.

Eligibility for a 403(b) plan

Not every employer can offer a 403(b), and not every employee is automatically eligible. But with thoughtful plan design, employers can expand access in ways that align with their mission and strengthen participation across their workforce.

To sponsor a 403(b), employers must fall into one of the following categories: public schools, churches and 501(c)(3) tax-exempt organizations, including K–12 school districts, hospitals, religious institutions and nonprofit service providers.

Most plans extend participation to:

• Full-time and part-time employees
• Adjunct or contract faculty
• Clergy and religious workers

403(b) contribution limits

Contributions to a 403(b) retirement plan are subject to annual IRS limits that adjust with inflation. Staying current with these numbers helps employers keep plans compliant and gives employees a clear understanding of how much they can save.

As of 2025, the standard employee contribution limit is $23,500. Employees aged 50 or older can contribute an additional $7,500 as a catch-up contribution, bringing their personal limit to $31,500 for the year. Employees aged 60-63 can contribute an additional $11,250 per year (totalling $34,750).

Employer contributions are separate and do not count toward the employee’s individual limit. However, the combined total of employee and employer contributions cannot exceed $70,000 in 2025 or $77,500 for those eligible for the catch-up ($81,250 for those ages 60-63.)

To help manage these limits, ADP offers integrated tools that track contributions in real time, flag potential overages and provide plan health dashboards. These resources give HR and payroll teams the clarity they need while helping employees stay on track with their goals.

403(b) withdrawal rules

While a 403(b) is built for long-term savings, there are rules and consequences around how and when funds can be accessed.

In most cases, employees can begin taking standard withdrawals at age 59½ without penalty. These withdrawals are taxed as ordinary income but won’t incur additional IRS penalties once that age threshold is reached.

Withdrawing funds before 59½ typically triggers a 10% early withdrawal penalty, on top of regular income tax. However, several exceptions may apply, including but not limited to:

• Death or permanent disability
• Qualified domestic relations orders (QDROs)
• Separation from service after age 55
• Certain qualified disaster distributions

Recent legislative changes have also expanded withdrawal options. New exceptions now allow penalty-free withdrawals for individuals diagnosed with a terminal illness, and limited emergency withdrawals are permitted under certain conditions, including financial emergencies up to $1,000 per year without penalties or mandatory repayment.

Additionally, many 403(b) plans allow hardship withdrawals in specific cases, such as preventing eviction or covering medical emergencies. These cases are subject to strict IRS guidelines and must be approved based on need. Some plans offer loan provisions as well, allowing employees to borrow from their balance and repay it with interest over time.

Employers should work closely with plan providers to confirm that withdrawal provisions are communicated clearly and align with current law. Employees feel more confident participating when they understand not only how to save, but also how and when they can access those savings if needed.

A complete list of 10% penalty exceptions is available from the IRS

Required minimum distributions (RMDs)

Saving for retirement is only part of the journey. Eventually, employees need to start withdrawing funds, and that’s where RMDs come into play.

Legislative changes increased the RMD beginning date from age 72 to 73 for individuals who turn 73 after December 31, 2022. If allowed under their 403(b) plan, they may delay their RMD beginning date until the year they retire, if later. RMDs must occur annually, with the first RMD due from their 403(b) accounts by April 1 of the year following the year they reach that age. (Waiting until the following year to begin RMDs requires taking a second RMD in that same year.)

For employers, RMDs come with specific responsibilities. They’re required to:

• Notify eligible participants about their upcoming RMD deadlines.
• Calculate and distribute the correct amounts based on IRS life expectancy tables and account balances.
• Report distributions accurately for tax purposes.

Missing these steps can result in penalties for both the participant and the plan. It’s important to have tools in place that help the process. ADP’s integrated retirement services include automated RMD tracking, participant notifications and clear guidance to help employees understand what’s required.

Note: RMDs do not apply to 403(b) Roth accounts.

Disadvantages of 403(b) plans

While 403(b) plans are a strong fit for many mission-driven organizations, they aren’t without limitations. Employers must know the trade-offs to make informed decisions and build a plan that truly works in their favor.

The first limitation is eligibility. 403(b) retirement plans are only available to public schools, religious organizations and 501(c)(3) nonprofits. Private sector employers must look to alternatives, like 401(k) plans.

403(b) plan designs can also feel constrained compared to other retirement plans. Generally, all employees must be eligible to make salary deferrals, but they may have limited investment options, especially if the plan does not use an open fund architecture. This drawback can restrict participant choice and affect long-term performance. However, 403(b) plans are not subject to certain nondiscrimination testing, which can be beneficial if an organization has higher wage earners.

Costs are another factor to consider. Fees can run higher if vendors or investment options are not reviewed regularly. Without oversight, it’s easy for outdated plan structures or bundled products to increase employer and employee expenses.

ADP offers access to independent fiduciary services under 3(21) or 3(38) designations, which helps organizations select and monitor investments objectively. With tools that promote transparency, regular benchmarking and open architecture access, employers can avoid common pitfalls and keep their plan working in the best interest of participants.

Why employers should consider a 403(b) plan as part of financial wellness

Financial wellness is about peace of mind as much as it’s about paychecks. When employees feel secure about their future, they bring more focus, energy and loyalty to their work. Sponsoring a 403(b) retirement plan – especially one that’s easy to use and clearly communicated – can help employers realize those positive outcomes. 403(b) plans also may feature automatic enrollment, auto-escalation and financial education modules to help employees develop positive saving habits.

¹Newly established 403(b) plans may be required under IRS rules to add an automatic enrollment feature.

M-732306-2025-04-30

ADP Inc. owns and operates the ADP.com website. Unless otherwise disclosed or agreed to in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products. Please consult with your own advisors for such advice. Investment options are available through the applicable entity(ies) for each retirement product. Investment options in the “ADP Direct Products” are available through either ADP Broker-Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 or (in the case of certain investments) ADP, Inc. Only registered representatives of ADP BD may offer and sell ADP retirement products and services or speak to retirement plan features and/or investment options available in any ADP retirement products.