403(b) vs. 401(k) Plans: What’s the Difference?

403(b) Vs. 401(k) Plan: An Overview

403(b) and 401(k) plans are both tax-advantaged retirement savings plans sponsored by employers for their employees. The biggest difference in the 403(b) vs. 401(k) is that the 403(b) is strictly for government and non-profit employees while the 401(k) is for employees of companies in the private sector.

Over time, some of the distinctions between the two have narrowed. For example, 403(b) plans used to be restricted to investing in tax-sheltered annuities, whereas 401(k) plans had a broader selection of investment options. However, this restriction on 403(b) plans was loosened in 1974, allowing participants to invest in mutual funds as well.

Both plans are named after the sections of the Internal Revenue Code that govern them.

Key Takeaways

• Both 401(k) and 403(b) plans offer tax advantages to both employees and employers.
• 401(k) plans are offered by private-sector employers, while 403(b) plans are for non-profit and government employees.
• Contributions to either type of plan can be made pre-tax or post-tax (via Roth options), and employers may also make contributions.
• The main differences between the two plans are related to who offers them and certain legal requirements.

401(k) Plans

A 401(k) plan allows employees to contribute a portion of their salary to a retirement account through automatic payroll deductions, up to an annual maximum dollar amount. The contributions are made on a pre-tax basis, meaning they are deducted before income tax is applied. The taxes are deferred until the money is withdrawn, usually in retirement.

The employee who chooses a traditional 401(k) plan gets an immediate tax break with every contribution, up to the maximum. The money invested in the fund will not be taxed until it is withdrawn, presumably after retirement. This is called a “pre-tax” plan.

Some employers also offer a Roth 401(k) plan. In this case, the income tax is paid immediately but no taxes will be owed when it is eventually withdrawn properly. The Roth is a “post-tax” plan.

The employer offering a 401(k) plan may make matching contributions on behalf of employees, up to a limit, and may also add a profit-sharing feature to the plan. These plans are often vested. That is, the employee must stay with the company for a set time, usually a few years, to have the full right of ownership over the money in the fund.

403(b) Plans

A 403(b) plan operates in much the same way as a 401(k), but it is designed for employees of public schools, non-profit organizations, and certain religious institutions. Participants include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.

While 403(b) plans offer the same basic retirement savings options, there are some distinctions:

• Vesting: Some 403(b) plans offer quicker vesting periods or allow immediate vesting of employer contributions.
• Investment Options: In the past, 403(b) plans were limited to tax-sheltered annuities, but mutual funds are now allowed.

Legal Differences Between 401(k) and 403(b) Plans

Unlike a 401(k) plan, 403(b) plans may not have to comply with all of the regulations in the Employee Retirement Income Security Act (ERISA). Notably, governmental employers, non-electing churches, and certain other organizations are exempt from following ERISA requirements.

For example, 403(b)s are typically exempt from nondiscrimination testing. Done annually, this testing is designed to prevent management-level or “highly compensated” employees from receiving a disproportionate amount of benefits from a given plan.

The reason for this and other exemptions is a long-standing Department of Labor regulation, under which 403(b) plans are not technically labeled as employer-sponsored as long as the employer does not fund contributions. However, if an employer does make contributions to employee 403(b) accounts, they are subject to the same ERISA guidelines and reporting requirements as those who offer 401(k) plans.

Additionally, investment funds are required to qualify as a registered investment company under the 1940 Securities and Exchange Act to be included in a 403(b) plan. This is not the case for 401(k) investment options.

Practical Differences Between 401(k) and 403(b) Plans

While both plans allow for employer contributions and pre-tax savings, there are practical differences:

• Employer Matching: Although 403(b) plans can offer employer matches, many employers do not offer them, preferring to maintain their ERISA exemption. However, if an employee has more than 15 years of service with certain nonprofits or government agencies, they may be able to make additional catch-up contributions to their 403(b) plans.
• Expense Ratios: Because of fewer regulatory requirements, 403(b) plans may have lower expense ratios than 401(k) plans. This can be an advantage for employees who are concerned about investment fees.
• Plan Administration: 401(k) plans are often administered by mutual fund companies, whereas 403(b) plans are frequently managed by insurance companies. This difference often leads to 403(b) plans offering fewer investment options, particularly annuities.

The SECURE Act and Annuities in 401(k) Plans

Employees with 401(k) plans may see more annuity options in their plans since the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. This law eliminates many of the barriers that had discouraged employers from offering annuities as 401(k) options.

By implementing certain guidelines and procedures, ERISA fiduciaries are now protected from being held liable should an annuity carrier have financial problems that prevent it from meeting its obligations to its 401(k) participants.

Additionally, under Section 109 of the SECURE Act, annuity plans offered in a 401(k) are now portable. This means that if the annuity plan is discontinued as an investment option, participants can transfer their annuity to another employer-sponsored retirement plan or IRA, thereby eliminating the need to liquidate the annuity and pay surrender charges and other fees.

What Are the Contribution Limits for 401(k) and 403(b) Plans?

The plans have the same yearly contribution limits set by the IRS at $23,000 for the 2024 tax year and $23,500 for 2025. People over age 50 can contribute an additional $7,500 in both years. A higher catch-up contribution limit applies for employees who are 60, 61, 62 and 63. In 2025, this catch-up contribution limit is $11,250.

Can I Contribute to Both a 401(k) and 403(b) Plan?

If you have two jobs, you might be offered both, assuming that one employer is a private company and the other is a government agency or a non-profit. In that case, you are allowed to contribute to both. You will still be subject to the overall limit on your combined contributions.

How Do Catch-Up Contributions Work With a 401(k) vs. 403(b) Plan?

With a 401(k) or 403(b), plan participants age 50 and older can make additional catch-up contributions above the standard contribution maximum. The catch-up contribution limit is $7,500 for both the 2024 and 2025 tax years. Employees who are 60, 61, 62 and 63 can contribute up to $11,250 in catch-up contributions In 2025.

In a 403(b) plan, employees with at least 15 years of service with the same employer can also make additional annual contributions that are the lesser of:

• $3,000,
• $15,000, reduced by the amount of additional elective deferrals made in prior years because of this rule, or,
• $5,000 times the number of the employee’s years of service for the organization, minus the total elective deferrals made for earlier years.

401(k) vs. 403(b): Which Is Better?

Both types of defined-contribution retirement accounts are solid retirement accounts that offer tax advantages and investment options for retirement. The major difference is in what type of employer is offering the plan,

The Bottom Line

Both 401(k) and 403(b) plans offer tax advantages and a way to save for retirement, but they differ in terms of employer type and regulatory requirements. If you’re offered both, it’s worth considering your employer’s contributions, investment options, and any catch-up contribution opportunities to maximize your retirement savings.