Navigating Recent Regulatory Changes in Tax-Sheltered Annuities (403(b) Plans): What Accountants and Plan Participants Need to Know

Tax-sheltered annuities (TSAs), or 403(b) plans, are key components of retirement strategy for employees of tax-exempt organizations, public education institutions, and certain ministries. Given sweeping updates from the SECURE Act 2.0 and evolving IRS guidelines, it is essential for accountants, financial advisors, and plan participants to remain abreast of legislative changes to maximize plan benefits and maintain compliance.

Comprehensive Benefits of 403(b) Plans

  • Tax Deferral: Elective deferrals to a 403(b) are made pre-tax, directly reducing your annual taxable income. Investment earnings accumulate on a tax-deferred basis until qualified distributions are taken at retirement.
  • Portability and Flexibility: Funds can generally be rolled over into IRAs, another eligible 403(b), or qualified plans like a 457(b), offering robust career mobility without sacrificing retirement growth.
  • Employer Contributions: Many plans provide for employer matching or discretionary contributions, enhancing long-term accumulation potential.

2025 403(b) Contribution Limits and Catch-Up Provisions

  • Elective Deferrals: For 2025, the annual elective deferral limit is $23,500. This amount is indexed periodically for inflation, so annual reviews are critical.
  • Age-Based Catch-Up: Participants aged 50 and older can make catch-up contributions. For 2025, individuals age 50-59 can contribute an additional $7,500, and a special catch-up of $11,250 is available for those aged 60–63.
  • 15-Year Service Catch-Up: Certain long-tenured employees (e.g., public school teachers, hospital staff, church employees) with at least 15 years of service may contribute up to an additional $3,000 per year, subject to strict eligibility and aggregation rules.

Aggregated Plan Contribution Limits for 2025

Annual aggregate contributions (including employee deferrals, employer contributions, and forfeitures) are capped at $70,000 or 100% of compensation, whichever is less. The annual compensation limit for calculating contributions is $350,000. These caps aggregate across all plans of the same employer, including 401(k), SEP, and SIMPLE plans, but exclude 457(b) deferred comp plans.

Mandatory Roth Treatment of Catch-Up Contributions

Effective for plan years beginning after December 31, 2025, participants whose Social Security wages exceed $145,000 must make all catch-up contributions to a Roth account within the 403(b) plan. Employers must also allow Roth catch-ups for all eligible participants, not just those triggering the wage threshold. This regulatory shift underscores the urgency of tax-planning and documentation review for high-earning clients.

Implementation Pitfalls and Compliance Tips

  • Universal Availability: 403(b) plans offering salary deferrals must extend this feature to all eligible employees, barring certain statutory exceptions. Violations can result in plan disqualification or IRS-imposed penalties.
  • Adhering to Contribution Caps: Your accountant should reconcile all plan contributions—including age and service-based catch-ups—to avoid excess contributions, which carry taxes and IRC Section 4973 penalties. Overcontributions must be corrected promptly.
  • Timely Deposit of Deferrals: Employer remittances must align with DOL guidelines, whereby participant contributions must be deposited as soon as administratively possible.

Distributions, Rollovers & New Withdrawal Provisions

Qualified distributions typically occur at retirement, upon reaching age 59½, or in response to disability, death, or certain terminations. Early withdrawals generally incur a 10% penalty unless a hardship, qualified loan, or other IRS exception applies.

The SECURE Act 2.0 adds flexibility for penalty-free withdrawals for emergency expenses and harmonizes 403(b) plan hardship rules with 401(k) plans, expanding the types of contributions eligible for hardship distribution.

Rollovers between 403(b), 457(b), and IRA accounts remain permissible, offering strategic planning opportunities for accountants and participants navigating job changes.

Plan Loans, Hardship, and Special Transfers

  • Plan Loans: Strict IRS rules dictate permissible loan amounts, terms, and repayments. Compliance monitoring is essential to avoid tax consequences.
  • Hardship Distributions: Now fully conformed with 401(k) standards, hardship withdrawals may include elective deferrals, employer nonelective contributions, and earnings thereon, subject to documented qualifying events.
  • Plan-to-Plan Transfers: Intra-plan transfers among approved investment providers are allowed within the same employer’s 403(b), promoting investment flexibility and administrative simplicity.

403(b) plans continue to offer formidable advantages for retirement savers—especially those in educational, nonprofit, and religious sectors. However, evolving contribution limits, Roth requirements, and compliance demands underscore the critical need for proactive tax planning and regular plan reviews. Accountants and plan participants are encouraged to consult with a retirement plan specialist to leverage new flexibilities and adhere to regulatory best practices.

For personalized plan analysis, implementation support, and ongoing regulatory guidance, contact our office today to ensure your retirement strategy remains efficient, compliant, and tailored to your financial goals.

Share this article...

Want tax & accounting tips and insights?

Sign up for our newsletter.

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .