Sponsoring a 403(b) plan is limited to three kinds of employers, and the requirements to run one legally cover who must be offered participation, how much can be contributed, how the money must be handled, what must be filed, and what happens when something goes wrong. The 403(b) plan sponsor requirements described below apply to employers that establish and maintain these tax-sheltered retirement programs for their workers.
Who Can Sponsor a 403(b) Plan
Federal law limits 403(b) sponsorship to three categories of employers. The first is any organization holding tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, which covers charities, private hospitals, museums, and similar nonprofits.1Office of the Law Revision Counsel. 26 U.S. Code 403 – Taxation of Employee Annuities The second is public educational institutions, from elementary schools through state universities, operated by a state, a political subdivision, or a government agency.2Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans The third is ministers and church-related organizations, which can set up retirement income accounts under rules tailored to religious employers.3eCFR. 26 CFR 1.403(b)-9 – Special Rules for Church Plans Private for-profit companies cannot sponsor a 403(b) plan and generally use 401(k) structures instead.
Whether a sponsor is subject to the Employee Retirement Income Security Act shapes many of the requirements that follow. Most nonprofit sponsors are covered. Governmental plans and church plans that have not elected ERISA coverage are exempt from ERISA’s fiduciary framework, Form 5500 filing, and several other obligations, though the tax code rules still apply.
Written Plan Document
Every 403(b) plan must be maintained under a formal written document that spells out eligibility rules, contribution formulas, available investment options, and distribution terms.4Internal Revenue Service. Written Plan Document Requirement for 403(b) Plans The document must be updated when tax law changes or when the sponsor modifies plan features. Operating without a compliant written document, or operating inconsistently with the one you have, can cost the plan its tax-advantaged status.
Universal Availability and Automatic Enrollment
If a 403(b) plan allows even one employee to make elective deferrals, it must extend that opportunity to virtually every other employee. This universal availability rule distinguishes 403(b) plans from 401(k) plans, which handle nondiscrimination differently.5Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans – Written Program The regulations do allow sponsors to exclude a few categories: employees eligible under another employer-sponsored deferral plan, nonresident aliens, students performing certain services, and employees who normally work fewer than 20 hours per week.6eCFR. 26 CFR 1.403(b)-5 – Nondiscrimination Rules Sponsors can also set a minimum deferral threshold of up to $200 per year before an employee is eligible. Church plans are exempt from universal availability.
The SECURE 2.0 Act requires any employer that established a new 403(b) plan after December 29, 2022, to automatically enroll eligible employees starting with the 2025 plan year. The initial default deferral rate must be at least 3% of compensation and must escalate by 1% annually until it reaches at least 10% but no more than 15%. Employees can opt out or change their rate at any time. Exempt from automatic enrollment: businesses less than three years old, employers with 10 or fewer employees, governmental plans, and church plans that have not elected ERISA coverage. Plans established before the December 2022 cutoff are not required to add automatic enrollment.
Contribution Limits for 2026
The sponsor is responsible for making sure employee contributions stay within the annual limits set by the IRS. For 2026, the basic elective deferral limit is $24,500. Participants aged 50 or older can defer an additional $8,000 in catch-up contributions.7Internal Revenue Service. Retirement Topics – 403(b) Contribution Limits
SECURE 2.0 introduced a higher catch-up for participants who are 60, 61, 62, or 63 years old at the end of the calendar year. For 2026, that enhanced catch-up is $11,250 instead of the standard $8,000.8Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Once a participant turns 64, they revert to the standard $8,000 catch-up. Tracking participant ages carefully is part of the sponsor’s job.
The 403(b) plan also has a 15-year service catch-up available to employees of educational institutions, hospitals, churches, and certain health and welfare agencies. Employees with at least 15 years of service at one of these qualifying organizations can contribute up to an extra $3,000 per year, subject to a lifetime cap of $15,000.9Internal Revenue Service. 403(b) Plans – Catch-Up Contributions When an employee qualifies for both the 15-year and the age-based catch-up, the 15-year catch-up is applied first.
The total annual additions limit under Section 415(c), which includes both employee deferrals and employer contributions, is $72,000 for 2026.10Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions Catch-up contributions do not count toward this cap.
Employer Contributions and Vesting
Sponsors can add to participant accounts through matching formulas, nonelective contributions, or both, subject to the same $72,000 total annual additions ceiling. ERISA allows two vesting structures for employer contributions in an individual account plan like a 403(b):
- Cliff vesting: 0% ownership of employer contributions until three years of service, then 100% vested immediately.
- Graded vesting: 20% after two years of service, increasing 20% each year until reaching 100% after six years.11Office of the Law Revision Counsel. 29 U.S. Code 1053 – Minimum Vesting Standards
A sponsor can always vest faster than ERISA requires, never slower. Employee elective deferrals are always 100% vested immediately, regardless of the schedule applied to employer money.
Fiduciary Duties, Bonding, and Participant-Directed Investments
ERISA imposes two core duties on sponsors. The duty of loyalty requires every fiduciary decision to be made solely for the benefit of participants and their beneficiaries. The duty of prudence requires acting with the care and skill that a knowledgeable person in a similar role would use.12Office of the Law Revision Counsel. 29 U.S. Code 1104 – Fiduciary Duties A fiduciary who breaches these duties faces personal liability for resulting losses, and the Department of Labor can assess a civil penalty equal to 20% of any amount recovered in a settlement or court judgment.13Office of the Law Revision Counsel. 29 U.S. Code 1132 – Civil Enforcement
These duties show up most clearly in selecting and monitoring investment options. Regular performance reviews, comparisons against appropriate benchmarks, and close attention to fees are the baseline. Every decision about the investment menu should be documented with the reasoning behind it, because that paper trail is the sponsor’s primary defense if a participant files suit.
ERISA also requires every person who handles plan funds to be covered by a fidelity bond protecting the plan against fraud or dishonesty. The bond must equal at least 10% of the funds that person handled in the prior year, with a floor of $1,000 and a ceiling of $500,000. Plans holding employer securities face a higher ceiling of $1,000,000.14Office of the Law Revision Counsel. 29 U.S. Code 1112 – Bonding The surety must be a corporate surety company approved by the Secretary of the Treasury. Operating without the required bond is itself a fiduciary violation.
Sponsors that let participants direct their own investments can claim protection under ERISA Section 404(c). When a participant exercises control over the assets in their account, the sponsor is generally not liable for losses from the participant’s investment choices.15Office of the Law Revision Counsel. 29 U.S. Code 1104 – Fiduciary Duties – Section: Control Over Assets by Participant or Beneficiary To qualify, the plan must offer at least three diversified alternatives with meaningfully different risk and return profiles, give participants enough information to make informed decisions, and allow selections to be changed frequently enough to manage volatility. This shield covers participant choices, not the sponsor’s choice of what to put on the menu.
Church plans that have not elected ERISA coverage and governmental plans are not subject to ERISA’s fiduciary framework. Sponsors still owe basic duties of fair dealing under state or common law and remain bound by the tax code rules that govern 403(b) plans.
Depositing Employee Contributions on Time
When an employer withholds elective deferrals from a paycheck, those funds must be transferred to the plan as soon as reasonably possible. Delays effectively mean the sponsor is holding employee money, and regulatory scrutiny in this area is common. Late deposits can trigger requirements to calculate and restore lost earnings to affected accounts, along with potential excise taxes. Depositing deferrals within a few business days of each payroll is the safest practice for most sponsors.
Hardship Distributions
Sponsors are not required to offer hardship withdrawals. If the plan document permits them, the sponsor must verify that each request meets the IRS’s requirements for an immediate and heavy financial need. Six safe-harbor categories automatically qualify:16Internal Revenue Service. Retirement Topics – Hardship Distributions
- Unreimbursed medical expenses for the employee, spouse, dependents, or a plan beneficiary.
- Costs directly related to buying the employee’s principal residence, excluding mortgage payments.
- Tuition, fees, and room and board for the next 12 months of postsecondary education for the employee or their family members.
- Payments needed to prevent eviction from or foreclosure on the employee’s principal residence.
- Funeral expenses for the employee, spouse, children, dependents, or a beneficiary.
- Certain expenses to repair damage to the employee’s principal residence.
Hardship withdrawals are taxable income and, for participants under 59½, generally carry a 10% early withdrawal penalty. If the plan allows them, the sponsor must administer them consistently and in line with the plan document.
Reporting to the Government and Participants
Most ERISA-covered 403(b) sponsors must file Form 5500 annually with the Department of Labor, reporting the plan’s financial condition, participant count, asset values, and administrative expenses.17U.S. Department of Labor. Form 5500 Series Church and governmental plans are generally exempt. Late or missing filings can trigger substantial daily penalties from both the DOL and the IRS that accumulate until the return is submitted. The DOL operates a Delinquent Filer Voluntary Compliance Program offering reduced penalties for sponsors who come forward before enforcement action begins.18U.S. Department of Labor. Delinquent Filer Voluntary Compliance (DFVC) Program
On the participant side, ERISA requires the plan administrator to furnish each new participant with a Summary Plan Description within 90 days of joining the plan. It must explain the plan’s rules and benefits in language the average participant can understand.19Office of the Law Revision Counsel. 29 U.S. Code 1024 – Filing With Secretary and Furnishing Information to Participants and Beneficiaries An updated version must be distributed every five years if amendments have been made, or every ten years even if the plan has not changed. When the plan is materially modified between those cycles, the sponsor must distribute a Summary of Material Modifications within 210 days after the end of the plan year in which the change was made.20Internal Revenue Service. 401(k) Resource Guide – Plan Participants – Summary Plan Description Sponsors also generally must provide fee disclosures that break down the costs of each investment option and periodic benefit statements showing account balances and performance.
Correcting Plan Errors
Operational mistakes happen, and the IRS provides a structured correction framework called the Employee Plans Compliance Resolution System. Two tracks are relevant to most 403(b) sponsors.
Under the Self-Correction Program, minor operational errors where the plan was not operated in accordance with its written terms can be corrected without contacting the IRS or paying any fee. For insignificant errors there is no deadline. For significant errors, the sponsor must complete the correction by the end of the third plan year after the year the failure occurred.21Internal Revenue Service. Correcting Plan Errors – Self-Correction Program (SCP) General Description Routine problems get fixed here: a missed deferral opportunity, an incorrect contribution calculation, or a failure to include an eligible employee.
Errors that cannot be self-corrected, including document failures and significant operational errors discovered outside the self-correction window, require a formal submission under the Voluntary Correction Program. The sponsor files an application describing the failure and proposed correction, along with a user fee based on plan assets:
- $0 to $500,000 in net assets: $2,000
- $500,001 to $10,000,000: $3,500
- Over $10,000,000: $4,00022Internal Revenue Service. Voluntary Correction Program (VCP) Fees
These fees apply to submissions made on or after January 1, 2026. Net plan assets are determined from the most recently filed Form 5500. Correcting errors through either program is far less expensive than having the IRS discover them during an audit, where the consequences can include plan disqualification and loss of all tax benefits.
Terminating a 403(b) Plan
When a sponsor decides to end its 403(b) plan, all plan assets generally must be distributed to participants within 12 months of the termination date. Annuity contracts can be distributed in kind, meaning participants receive the contract itself rather than a cash payout and are not taxed until they start receiving payments. Custodial accounts can similarly be distributed to individual participants, who then maintain the accounts outside the plan. As long as distributed custodial accounts continue to meet Section 403(b) requirements, they retain their tax-deferred status.
The sponsor must provide clear documentation of each participant’s accumulated value, their rights under the distributed account, and the ongoing responsibilities of the custodian. Poor termination procedures can leave participants unable to track their money or understand their distribution options, which invites regulatory scrutiny and participant complaints.