Employee Retirement Plans

By Bethany Ramos

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 closer 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:

1. 403(b) plan. Reserved for schools, churches, charities, and other entities exempt under IRC code 501(c)(3); tax-deferred retirement plan that allows employees to put a portion of their salary into an employer-sponsored retirement plan with the potential for matching contributions.


2. 457(b) plan. Similar to a 401(k) plan offered by a for-profit employer; deferred compensation plan available for various state and local government employees and other qualified nonprofits deemed tax-exempt under IRC section 501.

A 403(b) retirement plan may also be called a TSA (tax-sheltered annuity) or TDA (tax-deferred annuity) retirement account. This type of retirement fund for nonprofit organizations still incurs stiff penalties for withdrawing money early, similar to traditional retirement accounts. A 403(b) plan may be subject to early withdrawal penalties, like income tax on the withdrawal amount, a 10% penalty under the age of 59 ½, and 20% federal income tax withholding unless the withdrawal amount is rolled over into another qualified retirement account.

A 457(b) retirement plan is often divided into two different categories for government employees and nonprofit employees. A 457(b) nonprofit plan has advantages over a 403(b) in that there is no 10% penalty for withdrawing money before the age of 59 ½, as long as an employee is ending their employment or retiring fully. Income tax penalties can also be avoided if withdrawal money is rolled over into another retirement account.

Comparing nonprofit retirement plans

When someone mentions a retirement plan, most people think of a 401(k), associated with for-profit companies. 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 retirement plans:

• Are defined contribution retirement plans. This type of retirement plan specifies the annual amount an employer will contribute to the account. While employer account contributions are guaranteed, future benefits will vary based on investment earnings.


• Include 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), like:

• Testing. 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.


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

Pros and cons of nonprofit retirement plans

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 ensure that they understand their options so that they can provide a comprehensive retirement plan that works for an organization as a whole.

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