RETIREMENT PLAN 101

What is a 403(b) Plan

Nonprofit 403(b)

A 403(b) plan is an employer-sponsored retirement savings plan that functions much like the 401(k) plan. What’s unique about a 403(b)? For one, it can only be sponsored by a public school or a 501(c)(3) tax-exempt organization. Second, many of the compliance testing that apply to a 401(k) does not apply to the 403(b), such as ADP and top-heavy testing. There are many benefits to having a 403(b), making it a go-to retirement vehicle for nonprofit organizations.

In a 403(b) plan, an eligible employee elects a percentage or a dollar amount of her salary to contribute to the plan and the organization deducts the contributions through payroll that are deposited to an account established for the participant. Employees can choose to contribute either traditional pre-tax or Roth after-tax contribution depending on the plan specifications. Often, but not always, the organization will contribute a matching amount to persuade an employee to take advantage of the workplace retirement vehicle.

Who can establish a 403(b) Plan?

Technically, the two types of organizations that can establish 403(b) plans are:

  1. Tax-exempt organizations under IRC §501(c)(3), or
  2. Public schools or public educational organizations.

Section 501(c)(3) Organizations

Section 501(c)(3) organizations are not-for-profit organizations that are established under IRC §501(c)(3) of the Internal Revenue Code. Section 501(c)(3) organizations are nonprofit entities such as corporations, community chests, funds, or foundations. They are organized exclusively (1) for religious, charitable, scientific, literary, or educational purposes, (2) to foster amateur sports competition nationally or internationally, unless any of their activities involve providing athletic equipment or facilities, or (3) to prevent cruelty to children or animals. Net earnings of the organization may not inure to the benefit of private shareholders.

Public Schools or Public Educational Organizations

In general, public schools can establish 403(b) plans, and most often the public educational system of a state or community will establish a 403(b) plan. A public educational system is an organization run by a state, political subdivision, or agency that maintains a faculty and curriculum and has regularly enrolled students in attendance where educational activities are conducted.

Employer Benefits

  • Employee contributions to the plan are not subject to payroll taxes
  • Helps attract top talents, as well as reduced turnover, increased productivity and job satisfaction
  • Creates stakeholder value
  • Helps employees prepare for a healthier financial future

Employee Benefits

  • Save through easy payroll deductions, either pre-tax dollars, Roth after-tax dollars or a combination of both
  • Elect an amount they want to save, up to a certain IRS limit
  • Change an amount they want to save
  • Reduce their taxable income
  • Money can grow fast, thanks to deferred taxes
  • Enjoy tax-free savings and investment earnings until participant receives benefits at retirement

Pros

 

Cons

Attract, retain and reward top talents

Administrative expenses generally greater than IRA options, such as CalSavers or other IRAs

Highest employee contributions – $20,500 for 2022, plus $6,500 age 50 catch-up

More complex DOL and IRS annual non-discrimination testing requirements and government filings

Highest total (employee + employer) contributions – $61,000 for 2022, plus $6,500 age 50 catch-up

Employees can make pre-tax or Roth after-tax contributions

Most flexible plan design, including eligibility, contribution, vesting and withdrawal alternatives

Find the Right Plan for Your Business or Nonprofit

NESA Plan Consultants (NESA) is a retirement plan provider working with advisors, recordkeepers and CPAs to offer customized 401(k), 403(b) and 457(b) plans. NESA offers modern solutions and provides resources to employers and employees to secure a brighter financial future.

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