A Guide to How the Two Plans Differ
401(k) plans and 403(b) plans are both employer-sponsored retirement accounts that let employees set aside part of their paycheck, pretax or Roth, for retirement. They serve the same basic purpose, and for an employee contributing to one, the day-to-day experience often looks nearly identical: money comes out of each paycheck, goes into a menu of investment options, and grows over time.
But the two plans come from different parts of the tax code, and which one you’re offered usually has less to do with your job title and more to do with what kind of organization you work for. Here’s how they differ and why certain employers use one rather than the other.
What Is a 401(k)?
A 401(k) is named for the section of the Internal Revenue Code that created it. It’s the plan most people picture when they think of a workplace retirement account, and it’s available to virtually any private-sector employer, from a two-person startup to a multinational company. For-profit businesses of any size can sponsor one, and so can most nonprofit organizations, even though nonprofits can be eligible for the plan described below.
401(k) plans are usually covered by ERISA, the federal law that sets minimum standards for retirement plans. That means the plan sponsor assumes fiduciary duties, and the plan generally has to file an annual report with the government and provide employees with a written summary of how it works.
What Is a 403(b)?
A 403(b), sometimes called a tax-sheltered annuity plan, is available only to a specific set of employers:
- Public schools and school districts (K-12)
- Colleges and universities, public and private
- Hospitals and other 501(c)(3) tax-exempt organizations
- Churches and church-affiliated organizations
- Certain employees of cooperative hospital service organizations
The name comes from section 403(b) of the tax code. Because these plans were originally built around annuity contracts decades ago, that history still shows up in what many 403(b) plans are allowed to hold: annuity contracts and mutual funds inside custodial accounts, a narrower menu than most 401(k) plans offer. Many providers have since added lower-cost mutual fund lineups, but legacy annuity-based plans are still common, particularly in K-12 education.
Who Uses Which Plan?
Plan type tends to track the kind of organization you work for more than anything else:
| Organization Type | Typical Plan |
| For-profit businesses, any size or industry | 401(k) |
| Nonprofits outside education and healthcare | Either; many choose a 401(k) for design flexibility |
| Public K-12 school districts | 403(b), sometimes alongside a 457(b) |
| Colleges and universities | 403(b), though a growing number uses a 401(k) instead |
| Nonprofit hospitals and health systems | 403(b) historically, though many have shifted to a 401(k) as they’ve grown and modernized |
| Churches and religious organizations | 403(b), often exempt from ERISA |
| State and local government employers | Typically, a 457(b) or a 403(b) for public schools specifically |
That government row trips people up, and so does the nonprofit one. A 501(c)(3) is eligible for a 403(b), but it isn’t required to use one. Plenty of nonprofits, especially outside education and healthcare, sponsor a 401(k) instead because it offers more flexibility in plan design, or because their leadership is more familiar with it from prior for-profit jobs. There’s no rule that a nonprofit’s retirement plan has to look like every other nonprofit plan.
The Practical Differences, at a Glance
| 401(k) | 403(b) | |
| ERISA coverage | Generally covered | Can be exempt under narrow conditions |
| Investment menu | Broader range of investment options — including stocks, bonds, mutual funds, ETFs, and company stock. | Historically more limited, often focusing on mutual funds and annuities, with fewer direct stock or ETF choices |
| Nondiscrimination testing | ADP/ACP testing, unless the plan uses a safe harbor design | No ADP test; must satisfy the “universal availability” rule instead |
| Elective deferral limit (2026) | $24,500 | $24,500 |
A Couple of 2026 Changes Worth Knowing
The two plans are converging in a few ways under the SECURE 2.0 Act, regardless of which one you’re enrolled in:
- Automatic enrollment. Most 401(k) and 403(b) plans established after December 29, 2022, must now automatically enroll eligible employees at a default rate of 3% to 10%, increasing by 1% each year until reaching at least 10%. Plans established before that date, along with small and very new businesses, are exempt.
- Long-term part-time eligibility. As of 2025, employees who work between 500 and 999 hours in two consecutive years generally have to be allowed to make elective deferrals, even under a plan’s standard eligibility rules. This applies to 401(k) plans and to ERISA-covered 403(b) plans.
Neither change alters which employers can offer which plan. But both are reminders that the two plan types are governed by a lot of the same rulebook these days, even though they started from very different places.
The Bottom Line
The rules for 401(k) and 403(b) plans differ under the hood, especially around ERISA coverage and the investment menu. Still, the value of contributing consistently and choosing your investments carefully doesn’t change based on which one you’re handed.
If you’re an employer trying to decide which plan makes sense for your organization, or you’ve inherited a plan you’ve never had reviewed, Armbruster Capital Management can help you understand what you’re working with and whether it still fits.
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