R—403(b) Plans

403(b) plans are available to employees of public schools and colleges, and certain nonprofit hospitals, charitable, religious, scientific, and educational organizations. A 403(b) plan is also referred to as a “tax sheltered annuity,” or “TSA.” Rather than “tax sheltered annuity,” the Securities and Exchange Commission prefers the term “tax deferred annuity.” Many companies now use the terms “tax deferred annuity” and “TDA,” particularly when marketing variable annuities. 403(b) plans are also referred to as: (1) “qualified” annuity plans; and (2) “501(c)(3) plans” or “501(c)(3) pensions” (Section 501(c)(3)
describes certain tax-exempt organizations).

The employee may supply the funds by agreeing to a salary reduction, or by foregoing a salary increase, or the employer may make contributions as additional compensation to the employee. Contributions are before taxes, meaning that a participant is able to exclude the contributions from his current taxable income. Where a reduction in salary is taken to provide the premium payments for a 403(b) plan, Social Security taxes and benefits are based upon the unreduced salary (i.e., although income taxes are reduced, there is no reduction in Social Security taxes).

Generally, with a salary reduction plan the lowest of these two limits may be excluded from income each year: