Why retirement plans for nonprofit organizations are unique

Written by Meg C.

Retirement plans for nonprofit organizations are diverse and different from their for-profit counterparts. It’s important for every company to at least offer some type of retirement savings vehicle for its employees. Let's take a look at retirement plans for nonprofit organizations in more detail.

Specific examples of retirement plans for nonprofit organizations

Nonprofits usually offer their employees one of two different retirement plans: a 403(b) plan or a 457(b) plan. A 403(b) retirement plan is reserved for schools, churches, charities, and other entities exempt under IRC code 501(c)(3). This type of plan is similar to a 401(k) plan offered by a for-profit employer.

A 457(b) retirement plan is a deferred compensation plan that is available for various state and local government employees and other qualified nonprofits deemed tax-exempt under IRC section 501.

Comparing plans

When someone mentions a retirement plan, most people think of a 401(k). Nonprofits such as churches, schools, and charities can instead offer employees a 403(b) program. There are some striking similarities between these two plans.

Both the 401(k) associated with for-profit companies and the 403(b) for nonprofit organizations are defined contribution retirement plans. Both include a salary deferral on the part of the employee. Employees can sock away part of their salary, tax-deferred, each year. In some instances, a nonprofit employer can make matching contributions similar to a 401(k) plan.

There are a few differences between a 401(k) and 403(b). A 401(k) plan has to pass "top heavy" testing. These rules ensure that lower-paid employees retain a minimum benefit when compared to higher-paid employees. A 403(b) plan does not have to undergo "top heavy" testing. If a nonprofit organization has a handful of highly paid employees that wish to maximize their retirement savings, a 403(b) program is the way to go.

Only employees of an organization or company can contribute to a 401(k) or 403(b) plan. A 457(b) plan differs in that certain independent contractors are eligible to contribute to the plans. This is a remarkable difference in the way 457(b) plans differ from other available retirement plans.

Pros and cons

The biggest pro of retirement plans for employees of nonprofits is that such plans are vehicles in which employees can save for their future. These retirement savings are tax-deferred, both in the contributions and earnings of the contributions.

Another pro for 457(b) and 403(b) plans sponsored by governmental entities is that there is no need to file IRS form 5500. 403(b) plans sponsored by charities and other non-governmental entities also do not have to fill out form 5500 unless employer contributions are made.

A point against retirement plans for nonprofit organizations is that rollover options are typically limited. Many individuals like the fact that when they leave an employer that has a 401(k) program, they can easily roll their money into an IRA account. Participants of 457(b) plans can usually only roll their accounts into other 457(b) plans. The same is true for 403(b) plans.

Retirement plans for nonprofit companies offer unique benefits over retirement plans offered by for-profit companies, and make offering such plans less of a burden for the employer. Nonprofits need to make sure that they understand their options so that they can offer the correct retirement plans that work for the organization as a whole.

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