A 403(b) special pay plan allows your employer to contribute “special” payments for accumulated sick days, vacation days and other benefits to a 403(b) plan account rather than paying them as cash. This offers a number of benefits.
Reduced taxes
When your special pay goes into a retirement account instead of being paid to you in cash, Social Security and Medicare taxes do not apply. That saves 7.65% in taxes for both you and your employer.
Additional savings with tax deferral
Contributions made by your employer for your special pay are typically made on a pretax basis. Ordinary income taxes are deferred until you withdraw the money in retirement when you may be in a lower tax bracket. Withdrawals prior to age 59½ may be subject to income taxes plus a 10% additional tax.
Flexible access
The same withdrawal rules apply to the special pay plan as to the 403(b) plan. Penalty-free withdrawals begin at age 59½ or in or after the year you turn 55 if you leave your employer. Loans may be available, if offered by the plan.2
Your employer’s contributions to the 403(b) special pay plan are typically placed in a separate account from your other 403(b) savings. The accounts are tracked separately due to the differing contribution rules. Here are some other key features.
Automatic enrollment
If you leave your job for any reason and your employer offers a 403(b) special pay plan, you are automatically enrolled and will receive your special pay as a contribution to this plan. Participation is mandatory, so you do not have a choice to receive special pay in cash.
Potential five-year contribution schedule
Special pay contributions are subject to the IRS contribution limits for a 403(b) plan. For 2026 the annual limit for employer and employee contributions combined is the lesser of 100% of your annual includible compensation or $72,000. Given these limits and the potential need for employers to manage large special pay obligations, some plans may spread out contributions for up to five years after the year you leave your job.
The maximum an employer can pay in each of those years is based on a “deemed monthly compensation” amount calculated as 1/12 of your most recent year’s includible compensation. For example, if you earned $60,000 in includible compensation in your final year, the maximum contribution you could receive in each of the five years following termination would be $60,000. If your special pay exceeds that maximum (what the plan can legally accept in a given year), the excess is usually paid out to you in cash and would be taxable.
Check with your employer for the details of your particular plan.
Immediate vesting
You are immediately 100% vested in all contributions to your account.
Self-directed investing
You can invest your contributions as you wish based on the investment options available in your 403(b) plan. As with most retirement plans, the value of your account will fluctuate based on the performance of the underlying investments and could be worth more or less than the original contributions.3
Withdrawal rules for a 403(b) special pay plan are typically the same as for your 403(b) plan. These general rules are summarized below. Your 403(b) plan rules may differ. Please consult your tax advisor for tax information on plan withdrawals and distributions.
Withdrawals allowed, subject to tax, as applicable (no additional 10% tax)
- As of age 59½
- Severance from employment in or after the year you turn 55
- Your death or disability
- Certain unreimbursed medical expenses
Withdrawals allowed, subject to tax, as applicable (plus additional 10% tax)
- Severance from employment prior to age 55
- Financial hardship such as purchase of a primary residence, qualifying higher education costs, payments to prevent eviction from or foreclosure on a primary residence, funeral expenses and certain medical bills or expenses4
Tax-free loans may be available2
Distribution options
Once you’ve received your contributions, you may be able to:
- Leave the money in the plan for continued tax benefits
- Take qualified withdrawals in a lump sum, as periodic payments (monthly, quarterly, semiannually or annually) or however you wish
- Roll over the funds to an IRA or another employer-sponsored retirement plan, if allowed by the plan
Required minimum distributions (RMDs) generally must begin as of age 73 or when you leave your job, whichever is later.
For specific questions regarding your situation, speak with a tax professional or contact your Corebridge financial professional. Reach out to us if you don’t have an assigned financial advisor.
1 This information is general in nature, may be subject to change, and does not constitute legal, tax or accounting advice from Corebridge Financial employees, financial professionals or other representatives. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties.
2 If loans are provided by your plan, any loan amount not repaid on time will be taxed as ordinary income and may be subject to an additional 10% tax if you are under age 59½.
3 Remember all investment involves risk, including possible loss of principal.
4 A plan may permit hardship distributions to be taken from elective deferrals, qualified nonelective contributions and/or qualified matching contributions, and the earnings associated with any of those contribution types.
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