401(k) vs 403(b): Frequently Asked Questions

What is a 401(k)?

A 401(k) plan is one of the most common types of retirement plans in the U.S. A 401(k) is a type of employer-sponsored defined contribution plan that allows both the employer and the employees to make tax-deferred contributions of up to $20,500 ($27,000 if age 50 or older) per year toward retirement savings. Any entity type can sponsor a 401(k) plan.

What is a 403(b)?

A 403(b) plan is a type of employer-sponsored defined contribution plan that allows both the employer and the employees to make tax-deferred contributions of up to $20,500 ($27,000 if age 50 or older) per year toward retirement savings. 403(b) plans are less common than 401(k) plans because only tax-exempt entities are able to sponsor a 403(b) plan.

What is the difference between a 401(k) and a 403(b)?

Both 401(k) and 403(b) plans are excellent savings vehicles for retirement. However, they do have some differences. The main difference is who is able to provide these plans. Only tax-exempt entities (like a schools, hospitals, churches, or charities) can sponsor a 403(b) plan. Business entities can’t sponsor a 403(b) plan, but they can sponsor a 401(k) plan. Tax-exempt organizations can choose to sponsor either a 401(k) or a 403(b) plan.

There are also a few compliance differences between 401(k) and 403(b) plans. 403(b) plans aren’t required to pass Actual Deferral Percentage testing (ADP testing) or top heavy testing; 401(k) plans are required to pass these tests annually. 403(b) plans aren’t always required to comply with ERISA, whereas 401(k) plans are. 403(b) plans are only required to file IRS Form 5500 if they are ERISA-covered; 401(k) plans are required to file IRS Form 5500 annually.

403(b) and 401(k) plans also differ in the type of investments they are allowed to offer. 403(b) plans are limited to only annuities or mutual funds, while 401(k) plans can also include stocks, bonds, ETFs, and collective funds.

How are 401(k) and 403(b) plans similar?

While there are a few differences between 401(k) and 403(b) plans, these plans are mostly very similar.

Both plans provide a tax-deferred vehicle for employees to save for retirement. The annual contribution maximums are the same, and both can allow for Roth contributions (in addition to pre-tax contributions). 401(k) and 403(b) plans both also have a 10% penalty if funds are withdrawn prior to age 59 ½.

How do 401(k) and 403(b) plans compare against each other?

The below chart outlines how 401(k) plans compare to 403(b) plans:

How 401(k) and 403(b) plans compare against each other
401(k) 403(b)
General What it is An employer-sponsored defined contribution plan for business entities An employer sponsored defined contribution plan for non-profit entities
Who can Sponsor

Any business entity

*Non-profit entities have the option of sponsoring a 401(k) or 403(b)

Non-profit organizations, hospitals, schools, churches, 401(c)3 tax-exempt entities
Compliance ERISA-Covered Yes Sometimes
Form 5500 Required Yes Only if ERISA-covered
Nondiscrimination Testing Must pass annual nondiscrimination testing Excempt from certain compliance testing
Contributions Annual Contribution Limit $20,500 (+$6,500 catch-up contribution for age 50+) $20,500 (+$6,500 catch-up contribution for age 50+)
Annual Contribution Limit Contributions are made pre-tax and grow tax-deferred Contributions are made pre-tax and grow tax-deferred
Investments Annual Contribution Limit Mutual funds, stocks, bonds, annuities, collective-funds Only annuities or mutual funds
Collective Funds Eligible Yes No (unless a 403(b)9 church plan)
Other Annual Contribution Limit

Can be limited to:

  • Age 21 or over
  • 1000 hours of service per year

Employee Contributions: No eligibility limits

Which type of retirement plan is best for my non-profit organization?

Non-profit organizations can choose to sponsor either a 403(b) or a 401(k) plan, but determining which of these plan types is best can be complicated. The way to determine which of these plans is best for your organization is to seek guidance from an advisor who specializes in retirement plans for non-profit organizations. A specialized advisor will be able to help you navigate the pros and cons of each plan type, and help assess which makes the most sense for your organization.

At Fisher Investments, we specialize in helping non-profit organizations set up and administer retirement plans tailored to fit the unique needs of their employees.

Learn more about retirement plan options for your non-profit.
A book cover that reads 403(b) Plan Guide
About Fisher Investments 401k
About Us

Fisher Investments 401(k) Solutions is committed to bringing unparalleled support to small and mid-size businesses and their employees through 401(k) retirement plan services.

Contact Us
Contact Us

5525 NW Fisher Creek Drive Camas, WA 98607

844-343-4015
info401k@fi.com

Follow Us
Follow Us


© 2022 Fisher Investments. Fisher Investments 401(k) Solutions offers fiduciary and consulting services, including participant education, to company-sponsored 401(k) plans. Investing in securities involves the risk of loss. Glossary | Privacy | Sitemap