What is the difference between a 401(k) plan and a 403(b) plan?

• A. 401(k) is for private-sector; 403(b) for certain tax-exempt organizations; both defined contribution plans with similar tax treatment
• B. 401(k) is for government; 403(b) for private
• C. 401(k) is defined benefit; 403(b) is defined contribution
• D. 401(k) is employer-funded; 403(b) is employee-funded

Answer: (A)

The main idea being tested is who offers these plans and for whom they’re intended. Both a 401(k) and a 403(b) are defined contribution retirement plans with similar tax treatment: you defer compensation, investments grow tax-deferred, and distributions are taxed as ordinary income (with some Roth options in some plans).

The difference lies in who can sponsor the plan: a 401(k) is offered by private-sector employers, while a 403(b) is available to employees of eligible tax-exempt organizations such as public schools, churches, and many nonprofit groups. Government employers typically offer other retirement options (like 457 plans), not a 403(b), so the contrast isn’t government vs private.

That makes the statement about private-sector versus tax-exempt organizations the best description, since it accurately captures who each plan is designed for while noting that their tax treatment and basic structure are similar. The other choices mix up who is eligible, the type of plan (defined benefit vs defined contribution), or who funds the plan, which aren’t the defining distinctions between these two.