Contributions to 403(b) Plans

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Contributions to 403(b) Plans

Both employers and employees may make contributions into a 403(b) plan for an employee. However, in most cases, contributions to a 403(b) plan are made from an employee’s elective deferrals. The employee signs a salary reduction agreement with the employer, authorizing him or her to reduce a certain amount from the employee’s wages. This money is used to purchase an annuity contract or invest in a mutual fund. This annuity or mutual fund is the vehicle in which the 403(b) plan is invested.

How much can you contribute?

Before proceeding further, you will need to know what a MAC is.

A MAC (formerly called the exclusion allowance) is the "maximum amount contributable" that can be added to the plan tax-deferred.

Thus, if your MAC is $2,000, up to $2,000 worth of contributions will be tax-deferred. Amounts exceeding that will be penalized. The IRS issues regulations and formulas to help compute an individual’s MAC for the year.

The individual may elect to defer an amount up to the MAC. This is pre-tax, so no deduction can be taken on a tax return. The employee’s W2 will reflect the lower taxable income. Generally, an employee can elect to defer up to $23,000 for 2024; those over 50 are entitled to defer a "catch-up" of $7,500. However, both elective deferrals and employer contributions may not exceed the lesser of $69,000 in 2024 or the MAC.

If you are also contributing to another retirement plan

It should be noted that participation in a 403(b) plan qualifies as participation in an employer-sponsored retirement program. This may have consequences for an individual who is putting money into a second retirement plan. Someone who contributes to a tax-deferred annuity plan may not be eligible (depending upon his or her income) to deduct contributions to an individual retirement account.

IRS Publication 571 provides more detailed information on all aspects of 403(b) plans.