Nonprofit Retirement Plan: A Complete Guide

The Ultimate Guide to Planning a Nonprofit Retirement Plan

Nonprofit organizations are integral to society, providing support and benefits for public schools, religious organizations, and community organizations. Without these organizations, society would be unable to function as it does today. However, many nonprofit organization leaders are unaware of their options for a nonprofit retirement plan, making it harder to attract top talent.

Offering nonprofit workers a retirement savings plan is essential for organizations attracting qualified individuals to aid an admirable cause. But without proper knowledge, setting up a nonprofit retirement plan can be confusing and frustrating.

We’ve got you covered if you hope to implement a nonprofit retirement plan but don’t know where to start. This article will describe your options for nonprofit retirement plans so you can pay for your future while saving the world.

What Retirement Plans Are Available for Nonprofits?

Plan Type	Description
401(k) Plan	A defined contribution plan that allows employees to contribute a portion of their salary on a pre-tax basis. Employers may offer matching contributions.
403(b) Plan	Similar to a 401(k) plan but available to employees of certain tax-exempt organizations, including nonprofits, schools, and religious organizations.
Defined Benefit Plan	A traditional pension plan where the employer promises a specific monthly benefit to employees upon retirement, based on factors like salary and years of service.
SEP IRA	Simplified Employee Pension Individual Retirement Account, which allows employers to make tax-deductible contributions to a traditional IRA on behalf of employees.
Simple IRA	Savings Incentive Match Plan for Employees Individual Retirement Account, designed for small nonprofits with fewer than 100 employees.
Roth IRA	An individual retirement account where contributions are made with after-tax income, and qualified withdrawals in retirement are tax-free.
Employee Stock Ownership Plan (ESOP)	A plan that allows nonprofit employees to become owners of company stock, providing retirement benefits through stock ownership.
Profit-Sharing Plan	A plan where employers make contributions to employees’ retirement accounts based on the company’s profits or performance.
Nonqualified Plan	Retirement plans that do not meet specific IRS requirements, typically used to provide additional benefits to key employees.

Nonprofit organizations have two primary options available for a retirement savings plan: a 403(b) and 401(k) plan. Traditionally, 401(k) plans have only been offered to for-profit organizations. However, these plans have evolved to suit the needs of some nonprofits. Depending on your circumstances, one option might suit you more. Consider the following information when navigating the setup process.

What is a 403(b) Retirement Plan?

Often coined as a 401(k) for nonprofits, a 403(b) retirement account is a retirement plan catered to employees in the public school system, religious organizations, and qualified, tax-exempt organizations. These plans typically require contributions from the employee and employer; however, even if employers do not contribute to the plan, employees can still benefit from a 403(b) account.

Employees eligible for a 403(b) retirement plan voluntarily make pre-tax contributions with payroll deductions. The plan is tax-deferred and invests money in annuities and mutual funds. A 403(b) plan is also helpful for employers looking to choose how their organization’s insurance plan is structured and the options employees can choose from.

403(b) Accounts: Pros and Cons

There are numerous advantages to a 403(b) plan, and these accounts can give you the security you need to prepare for a comfortable, financially stable retirement. However, like all retirement plans, 403(b) accounts have advantages and disadvantages to consider before deciding. Below is a breakdown of standard 403(b) accounts pros and cons to give you a head start.403(b) Pros

• Easier compliance testing requirements
• Lower taxable income while contributing to the plan
• Potential for lower tax rates when funds are distributed
• Constantly-growing retirement money
• Potential for employer contributions to significantly increase your retirement savings
• Option to contribute income that you’ve paid taxes on
• Potential to receive an additional $3,000 annually for five years, depending on whether you meet catch-up contribution requirements

403(b) Cons

• Limited in how much you can contribute and how you can invest your money depending on your specific plan
• Taxes must be paid on withdrawals
• You’ll receive smaller paychecks for short-term
• Potential to incur penalty taxes for early withdrawals
• Only available using employer-approved investment tools, which could include high fees
• No requirements to adhere to the standards in the Employee Retirement Income Security Act of 1974

What is a 401(k) Retirement Plan?

While you might be familiar with a 401(k) plan within a for-profit organization, these plans are also available for nonprofits. A 401(k) plan allows participants to contribute a specific amount and receive matching contributions from their employers up to a certain percentage.

401(k) plans are popular for numerous organizations because of their flexibility and affordability compared to other options. While it’s not considered the traditional option for a nonprofit, 401(k) retirement plans are undoubtedly a valuable asset for many new nonprofits.

Other Types of Retirement Plan Accounts for Nonprofits

While a 403(b) or 401(k) plan is most common for nonprofit organizations, nonprofits with high cash flows or highly-compensated employees might consider the following types of plans:

• Defined Benefit (DB): A defined benefit plan offers employees pre-established benefits upon retirement. These plans reward employees based on how many years of service they contribute and their salary earnings.
• Nonqualified deferred compensation (NQDC): An NQDC plan allows employers to offer select employees tax-deferred benefits. This plan is agreed upon between the employer and employee, and the employer commits to paying the employee in the future.

How are the Plans Similar?

How are 403(b) and 401(k) plans similar? Let’s look at some of the ways that these two plans intersect.

Significant Contribution Limits

403(b) and 401(k) plans have significant contribution limits, allowing employees to save for retirement and protect their financial future. Notable contribution limits for both plans include the following:

• The total contributions to an employee’s account, including salary deferral, employer contribution, and profit-sharing contributions, can reach $61,000.
• In 2022, employees could defer as much as $20,500 of their annual pay.
• Catch-up contributions for individuals over 50 allow policyholders to contribute an additional $6,500. For some nonprofit employees, plans include an additional catch-up contribution of $3,000 annually. However, the employee must meet numerous requirements to receive this additional contribution.

Eligibility

Both 403(b) and 401(k) plans allow all company employees to participate in the plan, though the waiting period differs.

Elective Deferral

Another similarity between a 403(b) and 401(k) is the total employee elective deferral. The elective deferral, plus Roth IRA and your after-tax contributions, won’t exceed $66,000 or 100% of your contributions.

Termination

403(b) and 401(k) plans have the same termination guidelines, where the policy can be terminated at any time depending on pre-determined governing protocol.

Why are 403(b) Plans Unique?

Participants in a 403(b) plan can access unique benefits unavailable to participants of other plans. Consider the following as you decide whether a 403(b) plan is suitable for your organization.

Reduced Discrimination Testing

A 403(b) plan is often easier to administer for nonprofits than other plans. If a nonprofit organization doesn’t plan on making employer contributions, the reduced discrimination testing available in a 403(b) is ideal.

These plans do not require a top-heavy test, and other contributions and requirements are more accessible to qualify for. Therefore, a 403(b) plan allows highly-compensated employees to make contributions that help their future, even if other employees do not want to participate.

Universal Availability

Another bonus of 403(b) plans is that they are usually available to all employees within a nonprofit organization and allow for instant entry, regardless of the time spent with an organization. This factor makes 403(b) more universally available than 401(k) plans, which often have enrollment limitations.

Additional Catch-Up

A compelling feature of 403(b) plans is the additional catch-up option for some participants. While employees need to meet specific criteria to access the additional catch-up, such as having 15 years of experience with their current employer, accessing this option is available if your organization falls into any of the following categories:

• Public school system
• Home health service agency
• Health and welfare service agency
• Hospital
• Church
• Convention or association of churches

Deciding Which Option is Best

While 403(b) plans are traditionally used for nonprofit organizations, these plans aren’t suitable for every nonprofit. Deciding whether a 403(b) or 401(k) plan is best for your nonprofit organization is challenging but can be made simpler through the following considerations.

1. How much will your employer be contributing to your plan?
2. What is the vesting period for each plan? This period includes the time necessary to work before being eligible for the plan. Some 403(b) plans have short vesting periods or no period at all. 401(k) vesting periods are typically longer than 401(b) periods.
3. What are your investment options? 403(b) accounts often limit your investment options. While this might not be a problem for you, for others, this can throw a wrench in their financial plans. Determine your options and how the available investments have performed previously.
4. For employers, what flexibility options do you need to consider? If your organization could change to a C or S-Corp, a 401(k) will provide the flexibility necessary to navigate this transition.
5. How much will fees factor into your decision? 403(b) plans are notorious for having higher fees compared to a 401(k), which could influence your decision.