A 403(b) is a defined contribution retirement plan offered to eligible employees in public schools, tax-exempt organizations and churches, according to the Internal Revenue Service. Contributions deferred by eligible employees into their 403(b) accounts are not subject to state or federal income tax until distribution.
An employee enrolls and participates in a 403(b) plan through his employer. The employee’s contribution to the plan, known as an elective deferral, is carried out pre-tax as described and agreed to in a salary reduction agreement, according to the IRS. The amount deducted from the salary is directed to investments selected by the employee that are made available through the employer's plan. Known as elective deferrals, these contributions are not part of an employee’s taxable income. The contributions grow without being taxed until retirement, when withdrawals are considered as ordinary income subject to tax.
Employee participation in a 403(b) plan is voluntary, explains the IRS. The employer has the option of making non-elective contributions to employees' accounts.
A 403(b) account's assets can be placed in an annuity contract provided through an insurance company, a custodial account that is invested in mutual funds or a retirement income account for church employees, according to the IRS.