Nonprofit organizations can be rewarding to their employees in several ways — not
only do they feel good about what they're doing, but they can also have
benefits like traditional 401k plans and 403 B plans. So which types of plans
might be right for your organization, and which ones can help you manage your
costs as you run the plan? Hi, I'm Justin Pritchard and we're going to cover
several nonprofit retirement plan options including 403 B plans 401 k
plans and other types of plans that might help you manage expenses and help
people save for retirement — and potentially manage their taxes. In the
past 403 B plans got all the attention for nonprofit organizations
and that was for good reason. But over the years, the rules have changed so that
nonprofits can use other types of retirement plans as well, and it may even
make more sense to do so. So we will get to some of the unique
pros and cons of having a 403 B plan but we'll also talk about other options that
might make sense for your organization. And as a quick overview we can look at
how 401 k plans and 403 B plans compare and contrast so you get an idea of why
403 B isn't quite as popular as it used to be. Number one is that 401 k plans and
most 403 B plans nowadays (for private nonprofits we're talking here for the
most part) both of those plans need a written plan document and they
essentially look and feel like a 401 k plan. So number two, there are more 401k
providers out there then there are 403 B providers the result is that you have
more competition and you know typically that brings down the pricing on 401 k
plans compared to 403 B plans where you don't have quite as much choice. The last
thing is that not every not-for-profit organization is able to have a 403 B
plan. So you've got 501 C 6 trade groups for example they can't have a 403 B so
they might have a 401 K anyway the good news is that employees can save quite a
bit of money in both 401 k plans and 403 B plans if they choose to do so.
So both types of plans have the maximum $19,000 of salary deferral
in 2019 and that should change in future years with inflation. Those over
age 50 also have an additional catch-up contribution available to them of $6,000
again that could change over the years and the total contributions that go into
an employee's account can be as high as fifty-six thousand dollars for 2019 so
that would include the employees own contributions out of their pay as well
as any employer money that comes in on top of the employees contributions. So
those are some meaningful amounts! The one caveat is that 403 B plans may have
an additional catch-up contribution for certain employees and we'll talk about
that a bit later. Some other similarities include the ability to make either after
tax or pre-tax contributions to the plan. So if the plan allows it, if the employer
sets this up, employees can make after-tax Roth contributions if they
choose to do so or they can make pre-tax you might call "traditional" contributions
or they can mix and match and make some combination of both. What's more, there
may be loans and hardship distributions available from both types of plans. Again
these are options that the employer can add but doesn't have to offer. One
potential drawback for nonprofit organizations who are often concerned
about cost might be the administrative costs of running a 401 k plan as well as
some of the employer contributions that might be required. So it can you know
maybe cost a couple thousand dollars to run a 401 k plan. For a lot of
organizations that's not an option. The board of directors is concerned about
directing those funds towards the mission and they don't necessarily want
to pay administrative expenses maybe on top of even contributing to employee
accounts so that can be a challenge if a non-profit wants to offer a 401k or 403b
plan in some cases. What you should know as a quick overview about 401 k plans is
that sometimes they have discrimination tests that mess up what you think your
budget is going to be for the year or what an employee thinks that their
contribution is going to be for the year. So for example if somebody is trying to
contribute a lot of money but others in the plan are not contributing quite as
much it can restrict an employee's ability
to make the full contribution at full $19,000 for example or if plan assets
kind of stack up in too "heavy" a way then that can require the organization to
make a contribution of three percent — what might be called a top-heavy
contribution to the plan. And if the organization doesn't expect that, that's
obviously not a great thing. So 401k plans are pretty powerful but you need
to be aware of the pros and cons of using a 401k plan. The good news is that
there are less expensive options out there and they have pros and cons of
course. One of them that you might want to look at is a SIMPLE plan. It's
called a SIMPLE which is an IRA-type of plan stands for Savings Incentive Match
Plan for Employees, and what that does, this helps people save, again, quite a bit
of money each year if they choose to contribute that of their pay into the
plan they can save up to $13,000 per year in 2019, and those employees over
age 50 can make an additional $3,000 catch-up contribution on top of the
$13,000. So what do you need to know about SIMPLE plans? A couple of things.
Number one is there is no option to make Roth contributions so if somebody wanted
to make those after-tax Roth contributions they just can't do it in a
simple plan it's all going to go in pre-tax and then eventually have income
taxes on it when it comes back out another thing to know about is that
there are no loans in simple plans so again a whoreo 1k or 403b
if the employer offers it can allow somebody to borrow up to $50,000 or 50%
of their best at account balance whichever is less but a simple does not
offer and another thing to know about is that simples have basically immediate
vesting so when the money goes in it technically goes into an IRA account an
individual retirement account in the employees name at that point they can
take the money right back out immediately if they want to that may or
may not be a problem but if you did want to encourage people to keep their money
saved for the long term or if you want to give an incentive for people to stay
with the organization for several years then that ability to take the money
right back out is a little bit different than what you have in a 401k plan and
finally you can only have a simple plan in a given year you can't also have a
401k plan in that same year so if you decide to switch to a 401k plan let's
say after having a simple plan you need to plan you need to plan ahead to make
sure that they don't run over each other and cause any problems so let's start
about costs what does it cost to run a simple plan it's essentially just the
contributions that you make for employees so that might be one of two
choices that you have you can either give 2% of the employees compensation
each year that just goes to the employee whether they contribute or not the other
option is to give a 3% match on what the employee contributes so if they
contribute zero then nothing goes in from the employer but if the employee
contributes 3% they basically get a hundred percent match on that if they do
10% you're only going to match them up to three percent of their compensation
and in very limited cases you can reduce that just a little bit in certain years
but don't count on that plan on doing either the 2% contribution or the 3%
match other than that there are no administrative costs really with a
simple plan it's really just the time it takes for you to enroll employees maybe
communicate to them about the plan deal with it in payroll making sure that it
gets over to the vendors correctly but there isn't like an actual hard dollar
cost that you pay to run a simple plan in your organization so that's appealing
to a lot of nonprofits especially small nonprofits with limited funding a
payroll deduction IRA is another option and that's another step down in terms of
how much you can contribute each year to the plan as well as any costs to the
employer so a parallel deduction IRA is kind of what it sounds like you just set
up I arrays for people or have them do it and then you contribute out of their
pay into their own IRA it's not really an employer-sponsored plan that requires
an employer contribution like a matching contribution
or a profit-sharing contribution or anything like that
it's just a way to make it easier for employees to save money into the plan
sometimes all it takes is making things easier and people take the right actions
if you can just give them a road map to save some money they will end up saving
some money and that's what a payroll deduction IRA does very well so the
costs again are basically just the administrative tasks of dealing with the
contributions you know talking with employees about it if you talk with them
you definitely don't give investment advice if you're not licensed to do that
but you can let them know how the basics work that you have a plan that takes
money out of their page and then goes over to a vendor and over there the
employee can choose certain investments if they want to do that the good news
for employees is that they can make either pre-tax traditional or Roth
contributions now whether or not they're eligible to do so is a question and
that's something that each employee needs to verify for themselves so in a
401k for example it's a little bit different you know anybody who's
eligible to contribute can make Roth contributions up to $19,000 and that's
very simple and easy for people to understand but in an IRA they might not
be allowed to make Roth contributions they might not be able to make pre-tax
contributions or they might not be able to deduct those contributions on their
tax return they should typically be able to at least make a contribution and
whether or not it's broth or deductible or not it's going to be a question for
their CPA so it does put a little bit more work on employees they need to be
just a little bit more engaged but at least you're getting the money out of
their pay and into their retirement account before they have the chance to
spend it and that is a lot better than nothing another thing to know about
those payroll deduction IRAs is that it's not automated so you're not going
to reduce the w-2 that says you put in this much to the plan and therefore your
taxes are lower again the employee needs to deal with that all on their own some
good news though is that there is no discrimination testing you're not going
to have look at how much each person contributed
compared to some of the other employees and did they contribute too much or not
that is the case with a 401k plan you do need to typically look at who's
contributing how much are they putting in and is there any disparity that the
IRS doesn't like that gets really complicated we can talk about that
another time but that doesn't happen with the payroll deduction IRS order
simples and another thing to just be aware of with the payroll deduction I
erases again it's an IRA so the employees effectively 100% immediately
bested and it is their own money so why shouldn't they be it just came right out
of their pay and they put it in the account so they can take the money right
back out whenever they want to and before we get to the 403b specifics just
want to mention that there are some other options out there they're not the
ones that most small nonprofits are looking for these might make more sense
to organizations that have highly paid employees really highly paid employees
or huge cash flows coming through so they can afford to make large
contributions for employees and those would include a defined benefit plan or
a non-qualified deferred compensation plan maybe a 457 half so those are
options for a limited subset of not-for-profit groups okay before you
rule out a 403 B plan you might want to know at least what makes them unique and
should you maybe try one out instead of using a 401k plan so what makes 403 b's
unique and one of them is that there's not as much discrimination testing and
that kind of depends on the organization and are you gonna make any employer
contribution or not but you can really lighten the load on the discrimination
testing if you have a 403 B with no employer contribution now what does that
mean in plain English essentially that means that if you have highly
compensated employees who are trying to contribute a lot in to the plan and then
you have rank-and-file employees who don't earn as much and they choose not
to contribute to the plan sometimes that can cause problems which disqualifies
the highly compensated employees from making as big of a contribution as they
want to so they can't save as much as might want or need for retirement and
that frustrates them they might get refunds from the plan it's inconvenient
dealing with their taxes so if you can eliminate those discrimination tests
that you know may be beneficial for your organization something else that's
unique to 403 B plans is the additional catch-up contribution so this may be
hard to qualify for but in the right cases it can be helpful so employees who
have been employees of the organization for over 15 years may be able to
contribute an additional $3,000 per year now this gets pretty tricky I'm going to
read off the list here because your organization has to be a public school
system hospital home health service agency health and welfare service agency
a church or a convention or Association of churches or associated organizations
so not every nonprofit fits that criteria not every employee has been
there for 15 years and then there are a couple of other things that you know you
need to tick off certain check boxes but if it works well for your organization
then maybe 403 B makes sense okay another benefit for using a 403 B
for some organizations that you can make it a non ERISA plan and essentially that
means you don't follow certain rules and regulations related to retirement plans
and we're not talking about you get to do a bunch of illegal stuff but the
administrative burden is a lot easier you don't have to file certain forms and
returns it just it makes it administrative Liese err on the
organization and time is always at a premium so that's helpful again not
every organization not every nonprofit is going to be able to do that
especially if you do make an employer contribution like a matching
contribution for example that would disqualify you
but that's one potential benefit and beyond that there are a couple of other
differences that you get really into the details and 403 B plans have you know
one or two just weird things that apply to certain subsets of groups for example
administers housing allowance might be right if you have a religious
organization or post severance pay for certain employees who terminate
employment but you still want to make contributions to their account
these aren't things that are typically appealing to most again small private
nonprofits that are you know just doing things in the community but in some
cases they can be you know nice for helping people save for retirement so I
hope that helps you get an idea of what options are available to your
organization whether it's 401k plans simple payroll deduction IRA or even a
403b plan you've got lots of different choices you can pick on how expensive
it's going to be in terms of administrative costs and in terms of
contributions to employee accounts you can sort of pick a plan that makes the
most sense for you if you have any questions on that please let me know I'd
be happy to talk with you and we can make sure you get the plan that you need
you