4.3 Defined Contribution Plans: 401(k), 403(b), 457(b), and TSP
Key Takeaways
For 2026 the usual elective-deferral limit is $24,500, with an $8,000 regular catch-up.
The 2026 age-60–63 enhanced catch-up is $11,250; annual additions generally are limited to $72,000 before catch-ups.
Governmental and nongovernmental 457(b) plans differ in creditor exposure and rollover rights.
Defined Contribution Plans: 401(k), 403(b), 457(b), and TSP
Core Principle: Defined contribution plans shift the tri-fold burden of funding sufficiency, portfolio asset allocation, and personal longevity risk from the employer to the participant. Maximizing wealth accumulation and designing penalty-free decumulation pathways requires mastering statutory deferral ceilings under IRC Section 402(g), annual additions limits under Section 415(c), SECURE 2.0 catch-up mechanics, ERISA vesting schedules, loan restrictions, and early distribution penalty exemptions under Section 72(t).
Architectural Overview of Major Defined Contribution Plans
Defined contribution (DC) plans establish individual participant accounts where the ultimate retirement benefit equals the accumulated value of contributions, employer matches, and net investment earnings over time. Sponsoring organizations select plan structures based on their corporate entity type, regulatory framework, and employee demographics:
1. 401(k) Profit-Sharing Plans
Authorized under IRC Section 401(k), this is the benchmark employer-sponsored retirement vehicle for private-sector, for-profit corporations. Plans feature a Cash or Deferred Arrangement (CODA) allowing employees to defer pre-tax salary or make designated Roth 401(k) contributions. To ensure contributions do not disproportionately favor owners and executives, traditional 401(k) plans must satisfy annual nondiscrimination testing:
- Actual Deferral Percentage (ADP) Test: Compares elective deferrals of Highly Compensated Employees (HCEs) against Non-Highly Compensated Employees (NHCEs).
- Actual Contribution Percentage (ACP) Test: Compares employer matching and voluntary after-tax contributions between HCEs and NHCEs.
- Safe Harbor 401(k) Exemption: Employers can bypass ADP/ACP testing entirely by providing mandatory, 100% immediately vested contributions—either a non-elective contribution of at least 3% of compensation to all eligible NHCEs, or a basic matching formula (100% on the first 3% of pay plus 50% on the next 2%).
2. 403(b) Tax-Sheltered Annuities (TSAs)
Authorized under IRC Section 403(b), these plans serve employees of public school systems, state colleges/universities, and organizations exempt from federal taxation under IRC Section 501(c)(3) (such as non-profit hospitals, charitable foundations, and religious institutions). Originally restricted strictly to annuity contracts, 403(b)(7) custodial accounts now permit investments in mutual funds.
- Special 15-Year Catch-Up Rule: In addition to standard deferral limits, 403(b) participants who have completed at least 15 years of service with a qualifying employer (schools, hospitals, home health service agencies, churches) can make additional elective deferrals of up to $3,000 per year, subject to a $15,000 lifetime cap, provided prior-year deferrals did not average more than $5,000 annually.
3. Section 457(b) Deferred Compensation Plans
Established under IRC Section 457, these plans provide tax-advantaged retirement savings for state and local government entities and tax-exempt non-profit organizations. A crucial distinction exists between governmental and non-governmental designs:
| Feature | Governmental 457(b) | Non-Governmental Tax-Exempt 457(b) |
|---|---|---|
| Eligible Employers | State, county, city, public school entities | Private 501(c) non-profits (trade groups, charities, hospitals) |
| Asset Custody & Protection | Exclusive Benefit Trust. Assets legally shielded from government creditors under IRC § 457(g). | Unfunded Book Reserve. Assets remain employer property, subject to general creditors in corporate bankruptcy. |
| 10% Early Penalty (IRC § 72(t)) | Generally exempt on original 457(b) funds; separately tracked roll-ins can be subject to the additional tax | EXEMPT. No 10% penalty under § 72(t) applies. |
| Rollover Portability | Full Portability. Can roll over to Traditional IRAs, 401(k), 403(b), or another 457(b). | Restricted. Cannot roll over to an IRA or 401(k); can only transfer to another non-gov 457(b). |
The Dual Limit Advantage: Elective deferrals into a 457(b) plan do not coordinate with or reduce elective deferrals into a 401(k) or 403(b). A public school teacher whose district offers both a 403(b) and a governmental 457(b) can contribute the full $24,500 maximum to the 403(b) and an additional $24,500 to the 457(b) in the same calendar year, sheltering $49,000 of pre-tax salary.
4. Thrift Savings Plan (TSP)
The Thrift Savings Plan (TSP) is the federal government's defined contribution plan, serving Federal Employees Retirement System (FERS) employees, Civil Service Retirement System (CSRS) employees, and members of the uniformed armed services. The TSP is renowned for ultra-low expense ratios and simplicity, structured around five core index funds:
- G Fund (Government Securities Investment Fund): Specially issued short-term U.S. Treasury securities carrying zero credit risk and paying a long-term Treasury rate.
- F Fund (Fixed Income Index): Tracks the Bloomberg U.S. Aggregate Bond Index.
- C Fund (Common Stock Index): Replicates the broad large-cap S&P 500 Index.
- S Fund (Small Capitalization Stock Index): Tracks the Dow Jones U.S. Completion Total Stock Market Index (non-S&P 500 mid/small-cap domestic equities).
- I Fund (International Stock Index): Tracks the MSCI ACWI IMI ex USA ex China ex Hong Kong Index, including developed and emerging markets outside those exclusions.
- Lifecycle (L) Funds: Target-date funds that automatically rebalance along a glide path across the core funds.
Under FERS, the agency automatically contributes 1% of basic pay (regardless of whether the employee contributes) and provides up to an additional 4% matching contribution (100% match on the first 3% of basic pay, plus 50% match on the next 2%), yielding a total potential agency contribution of 5%.
Contribution Limits, Catch-Ups, and SECURE 2.0 Enhancements
Advisors must navigate multiple overlapping contribution statutory ceilings established by the Internal Revenue Code and updated under the SECURE 2.0 Act of 2022:
IRC Section 402(g) Elective Deferral Limit
The statutory cap on employee salary deferrals across all 401(k), 403(b), and TSP accounts held by an individual is indexed annually for inflation:
- Base Deferral Limit: $23,000 (2024), $23,500 (2025), and $24,500 (2026).
- This limit applies on a per-taxpayer basis across all 401(k) and 403(b) plans combined during the calendar year (excluding separate 457(b) limits).
Age 50+ Catch-Up Contributions
Participants who attain age 50 or older by December 31 of the taxable year can make an additional catch-up contribution:
- Standard Catch-Up: $7,500 in 2024/2025; $8,000 in 2026.
SECURE 2.0 Enhanced Catch-Up for Ages 60, 61, 62, and 63
Beginning in 2025, SECURE 2.0 creates a higher, "super catch-up" tier for workers reaching ages 60, 61, 62, and 63 during the tax year:
- The enhanced catch-up equals the greater of $10,000 or 150% of the 2024 regular catch-up amount, indexed under the statute (e.g., 150% × $7,500 = $11,250 in 2025/2026).
- Once the participant turns age 64, the maximum allowable catch-up drops back down to the standard age-50 catch-up ($8,000 in 2026).
Mandatory Roth catch-up effective in 2026
Starting in 2026, covered participants with more than $150,000 of prior-year FICA wages from the sponsoring employer generally must make catch-up contributions as Roth contributions. This uses 2025 wages for 2026 catch-ups, not household AGI. The threshold is indexed. The statutory requirement begins in 2026; final regulations have later general applicability and transition provisions. Confirm plan implementation and relevant exceptions with the administrator. Do not conclude that every lower-paid employee loses all catch-up eligibility merely because the plan lacks a Roth feature.
Employer Contributions, Vesting, and IRC Section 415(c) Annual Additions Cap
While Section 402(g) restricts what the employee can defer from their own salary, IRC Section 415(c) establishes an overall annual additions limit encompassing all contributions deposited into a participant's account within a single limitation year.
Annual Additions Scope and Limits
Total annual additions include:
- Employee pre-tax and Roth elective deferrals,
- Employer matching contributions,
- Employer non-elective profit-sharing contributions,
- Reallocated plan forfeitures, and
- Employee voluntary after-tax non-Roth contributions.
(Participants age 50+ can add the applicable catch-up on top of this $72,000 ceiling, allowing a 2026 total of $80,000 with the regular catch-up or $83,250 with the age-60–63 catch-up).
The "Mega-Backdoor Roth" Strategy
In this explicitly 2025 example, executives who have already reached the $23,500 Section 402(g) limit and received, for example, a $15,000 employer match can utilize voluntary after-tax non-Roth contributions to absorb the remaining capacity up to the $70,000 Section 415(c) ceiling ($70,000 - $23,500 - $15,000 = $31,500). If the plan document permits in-plan Roth conversions or in-service after-tax rollovers, the executive can immediately convert those after-tax dollars into a Roth 401(k) or Roth IRA, permanently shielding future capital gains and dividends from taxation.
ERISA Vesting Schedules
While an employee's own elective deferrals and rollover balances are 100% immediately vested by federal law, employer matching and profit-sharing contributions may be subject to statutory vesting schedules under ERISA and the Pension Protection Act of 2006:
- 3-Year Cliff Vesting: 0% vested in Years 1 and 2; 100% fully vested upon completing 3 years of service.
- 2-to-6-Year Graded Vesting: 0% in Year 1, 20% in Year 2, 40% in Year 3, 60% in Year 4, 80% in Year 5, and 100% in Year 6.
A senior executive at a private tax-exempt charitable hospital participates in a non-governmental 457(b) plan, while a municipal fire chief participates in a governmental 457(b) plan. Which of the following statements accurately distinguishes the creditor protection and rollover portability of their plans?
The fire chief's governmental 457(b) is backed by an exclusive benefit trust protected from public creditors and can be rolled over to a Traditional IRA, whereas the hospital executive's non-governmental 457(b) remains an unfunded employer liability vulnerable to bankruptcy creditors and cannot be rolled into an IRA
Both 457(b) plans are federally insured by the PBGC and offer identical unlimited rollover rights into qualified corporate 401(k) plans upon separation from service
The hospital executive's plan holds assets in an irrevocable secular trust that is completely exempt from federal income taxation upon distribution, whereas the fire chief's plan is subject to a mandatory 10% early withdrawal penalty under Section 72(t)
The fire chief's governmental plan is treated as an unfunded general corporate asset subject to city bondholder claims, whereas the non-governmental 457(b) must be rolled over into a Roth IRA within 60 days of separation
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