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by Justin Rollins, Senior Plan Consultant, U.S. OMNI & TSACG Compliance Services

Offering employer contributions to a 403(b) plan provides school districts with a strategic tool to attract and retain talent, offer tax-advantaged benefits, and enhance employee satisfaction while ensuring compliance with IRS regulations and plan requirements.

In-Service Employer Contributions

There are several reasons why employers should consider making Employer (ER) contributions on behalf of their staff to a 403(b) plan:

• Attracting and Retaining Talent: Offering a 403(b) plan with ER contributions can make the school district more attractive to potential employees and help retain current staff.
• Benefit Addition: School districts can use ER contributions as additional benefit/compensation opportunities for the Superintendent and administrative staff.
• Tax Advantages: ER contributions to a 403(b) plan are exempt from FICA taxes, which will reduce the employer’s tax liability.
• Employee Satisfaction and Productivity: Contributing to employees’ retirement plans can boost morale and productivity, as employees feel more secure about their financial future.
• Reduced Turnover Costs: By retaining employees through attractive benefits, employers can reduce the costs associated with high turnover, such as recruitment and training expenses.

Post-Employment Contributions From Severance Pay

Employees may make elective deferral contributions into their 403(b) accounts from amounts received after their severance from service ("termination pay") which are attributable to accumulated unused sick leave, vacation pay, per diem paid time off benefits as well as any job performance pay (such as bonuses) that the employee would have received had they stayed employed. IRS regulations make it clear these types of severance pay can be used for elective deferrals to 403(b) and 457(b) plans, provided the amounts are paid before the end of the tax year of severance, or, if later, within 2 ½ months of the time employment is severed.

There is an alternative method of paying termination pay that employers may consider. In lieu of paying a cash termination pay benefit, employers could consider making non-elective employer 403(b) contributions into terminating employees' 403(b) accounts.

It is important to note that post-employment payments such as early retirement incentives or buy-outs of individually negotiated contracts are NOT eligible for elective deferral into 403(b) or 457(b) plans. The only way these monies can be deposited to 403(b) or 457(b) plan is as a non-elective employer contribution.

Key components of an ER contributory program include the following:

• ER contributions are generally considered pension contributions not compensation and as such are not subject to FICA taxes. This same exemption, however, does not apply to the use of 457(b) accounts. Given this information, 457(b) accounts are generally not considered for employer contributory programs.
• The addition of ER contributions may permit an employee to contribute up to $70,000.00 to their 403(b) in 2025.
• Employees receiving an employer contribution must have a 403(b) account established prior to termination of employment. Failure to do so may result in the forfeiture of the benefit.
• Employees receiving an ER contribution must not be given a “cash” option in lieu of the 403(b) contribution. The payment of cash can be included in the plan’s structure; however, the employee may not have discretion concerning the amount.
• Governmental employers are exempt from Title I of ERISA allowing them to negotiate with and structure different types of ER contributory programs with their varying employee classifications. Further, some classifications can be excluded entirely from the employer contributory plan. 
• The 403(b) Plan Document needs to include a provision to allow ER contributions in the plan.
• The school district needs to maintain ER contribution documentation to describe what and for whom. This language can be included in collectively bargained or individually negotiated contracts. The language can also be in the form of an administrative policy.

Prior to entering into agreements to pay ER contributions, the school district should consult their 403(b) Third Party Administrator and legal counsel (if applicable).