👥 Customer Accounts · Lesson 7 of 8 · 6 min

Employer Plans: 401(k), 403(b), 457, SEP and SIMPLE

🏢 A teacher, a city clerk and a startup engineer all save for retirement at work, in three different plans.

💡 Key idea

403(b) = schools and nonprofits; 457 = governments; SEP = employer money only; SIMPLE = 100 or fewer employees. 2026 deferral limit $24,500.

🧠 Why it matters

QUALIFIED plans meet IRS and (for private employers) ERISA rules: they cannot favor highly paid employees, the employer deducts contributions when made, and growth is tax-deferred. NONQUALIFIED plans (e.g., deferred compensation) may favor executives, but the employer deducts only when benefits are paid. DEFINED BENEFIT plans promise a set payout; DEFINED CONTRIBUTION plans set what goes in, and the payout depends on results. 401(k): private employers. 403(b): public schools and 501(c)(3) nonprofits. 457(b): state and local governments. SEP: employer-funded, popular with small businesses and the self-employed. SIMPLE: employers with 100 or fewer employees. 2026 elective deferral limit: $24,500 (401(k), 403(b), governmental 457(b)); catch-up $8,000 at 50+, or $11,250 at ages 60–63 (SECURE 2.0).

📈 In the real world

👩‍🏫 Dana, a fictional public-school teacher aged 61, defers into her 403(b). For 2026 she may defer $24,500 plus an $11,250 age 60–63 catch-up. Her friend, a city clerk, uses a 457(b). Her brother, self-employed, uses a SEP.

📌 Takeaways

Qualified: nondiscriminatory and tax-advantaged; nonqualified may favor executives
DB promises a payout; DC sets the contribution
2026: $24,500 deferral; $8,000 catch-up at 50+, $11,250 at 60–63

📖 Terms in this lesson

401(k) plan: An employer-sponsored defined contribution plan funded by employee salary deferrals, often with employer matching.

403(b) plan: A retirement savings plan for employees of public schools and certain tax-exempt organizations.

SEP IRA: A retirement plan for small businesses and the self-employed, funded by employer contributions to employees' IRAs.

ERISA: The federal law setting standards for most private employer retirement plans; it does not cover government plans.

Defined benefit plan: A pension that promises a set retirement payment, with the employer bearing the investment risk.

✅ Test yourself

Which employer plan is designed for public schools and 501(c)(3) organizations?

457(b) plan
Keogh plan
SEP plan
403(b) plan

Answer: D · 403(b) plan

403(b) plans serve public schools and tax-exempt 501(c)(3) organizations. 457(b) plans serve state and local governments; Keogh and SEP plans are for self-employed people and small businesses.

Which feature describes a nonqualified deferred compensation plan?

It is fully protected by ERISA
It must cover all employees
Contributions are deductible now
It may favor selected executives

Answer: D · It may favor selected executives

Nonqualified plans may be offered to selected executives. They do not get qualified-plan treatment: the employer's deduction waits until benefits are paid, and they are not subject to ERISA's full requirements.

For 2026, what is the 401(k) elective deferral limit before catch-ups?

$7,500
$23,500
$24,500
$22,500

Answer: C · $24,500

The IRS set the 2026 401(k)/403(b)/governmental 457(b) deferral limit at $24,500. $23,500 was the 2025 limit, and $7,500 is the 2026 IRA limit.

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