Nonprofit entities face a slew of practical, operational, and financial concerns not echoed in the for-profit sector.  And though retirement plans aren’t unique to nonprofit employers or their employees, the plans available can vary in kind and functionality.

If you’re considering implementing a benefit plan for your nonprofit, here’s what you need to know, including which types of retirement plans to consider and the key features of each.

An Overview of Nonprofit Retirement Plans

There are several retirement plans available to nonprofits, with the following accounting for the most popular ones leveraged by organizations in the United States.

403(b) Retirement Plans

Also known as a tax-sheltered annuity (TSA) plan, a 403(b) retirement plan can be offered to employees of public schools, including colleges and universities, religious organizations, and other charitable organizations with a 503(c)(3) status. It operates similarly to a 401(k) plan, allowing employee participants to defer a portion of their earnings into a retirement account.  Employers can also contribute to employee accounts.

Tax benefits

403(b) plans can be structured as traditional or Roth accounts. Traditional 403(b) accounts are funded with pre-tax dollars and funds grow tax-free until they are withdrawn, at which point they are taxed.

Roth 403(b) accounts are funded with after-tax dollars. Funds can grow and be withdrawn from the account tax-free.

Employee Contribution limits

Employees can contribute up to $22,500 annually. The plan also allows individuals who are 50 or older to make a catch-up contribution of up to $7,500 annually. An additional catch-up contribution is available to individuals who have completed 15 years of service.

Employer contribution and matching options

Employers can contribute to employee accounts through non-elective and matching contributions. Matching contributions can be up to 25% of the employee’s compensation.  The combined limit is $66,000.

Compliance and Regulations*

The following information can be helpful when considering a 403(b) for your organization.

• Assets can only be held in an insurer-provided annuity contract, mutual funds via custodial accounts and, in the case of churches, a retirement income account for employees of the church.
• Plans can but are not required to include a provision allowing participants to take loans out against their 403(b) account.
• A written program is required to maintain the plan. This program must define eligibility, plan benefits, distributions (timing and form), plan administration, and plan limitations.
• Plans are subject to universal availability, which includes the requirement that if one employee is offered the option to participate in a 403(b), that same option must be available for all eligible employees.
• Assets available for investment are largely limited to annuities and custodian-held mutual accounts.

401(k) Plans for Nonprofits

401(k) plans are one of the most popular retirement plans available and are perfectly suitable for nonprofits. These plans rely on employee contributions, though they often include a matching or non-elective employer contribution.

Tax benefits

Funds in a 401(k) grow tax-free. Traditional 401(k)s are made with pre-tax dollars, and employees pay taxes on withdrawals. Roth 401(k)s are funded with after-tax dollars, but employees enjoy tax-free qualified withdrawals during retirement. In special cases, employers may offer a self-directed 401(k), which gives employees greater investment freedom.

Employer contributions are tax-deductible on the employer’s federal tax.

Employee Contribution limits

401(k)s offer the same employee contribution limit as 403(b) plans: $22,500 annually with an additional $7,500 in catch-up contributions available to individuals who are 50 or older.

Employer contribution and matching options

Employers can contribute to employee accounts in one of two ways. With a non-elective contribution, the employer determines an amount unrelated to the employee’s contribution. Under a matching structure, the employer can contribute a percentage, such as 3% of the employee’s contribution.

In either scenario, the combined employee and employer contribution can not exceed the lesser of 100% of the employee’s compensation or $66,000.

Compliance and Regulations*

• Like other qualified requirement plans, a 401(k) must be made available to all eligible employees.
• Non-profits offering a 401(k) to employees can simultaneously offer 403(b) plans.
• Participants can invest in common assets, such as stocks, bonds, and mutual funds, though employers can provide self-directed options, which would expand investment options.

Defined Benefit Pension Plans

A defined benefit pension plan, also known simply as a “pension,” is unique in that the end account balance is pre-formulated based on several factors, such as the employee’s age, salary, and time with the organization. Under this type of plan, the recipient is guaranteed a salary-like payment based on the plan established by the employer.

Though these plans are often considered a more secure approach toward retirement, they can be complex and are less common than they once were.

Tax benefits

Since pension plans offer a specific benefit, not dependent on investment growth, employees don’t receive the same tax benefits (like tax-free growth) they may with other plans. If the plan is designed as a Roth, the employee does not need to pay taxes on any portion they contributed during the plan–although they will need to pay income taxes on any contribution made by the employer or any contribution they made under a traditional plan structure.

Employer deductions for a defined benefit plan are often higher than available under other qualifying plans; however, employers may face an excise tax if they don’t meet minimum contributions as determined by the plan actuary.

Employee Contribution limits

Employees typically don’t contribute to their plan, but they may be required to or have the option to contribute. Still, an employee’s annual benefit cannot exceed 100% of their average compensation for their three consecutive highest earning years or $265,000, whichever is lesser.

Employer contribution and matching options

Employer contributions are based on the amount needed to meet the benefit outlined by the plan and are determined by an actuary.

Compliance and Regulations*

• Employers must rely on an actuary to determine the annual contributions.
• Plans are primarily funded by the employer and the benefit received by the employee is not dependent on market performance.
• Catch-up contributions are not permitted.
• Loans may be permitted, though this varies by plan rules.
• A model form is not required to establish this plan.

SIMPLE IRAs

A Savings Incentive Match Plan or SIMPLE IRA is a retirement plan designed for small business owners. It’s easier to set up and administer when compared to qualified retirement plans such as a 401(k) or 403(b). An employer and any employee earning over $5,000 annually can contribute to a SIMPLE IRA.

Tax benefits

SIMPLE IRAs can be structured as traditional or Roth accounts, though the Roth designation option is new as of 2023 with the passage of the SECURE 2.0 Act. Roth designations allow for after-tax contributions and tax-free withdrawals. Traditional accounts allow for pre-tax contributions with taxed withdrawals. Both provide tax-free growth while the funds are in the account.

Employers can deduct contributions.

Employee Contribution limits

Employees can contribute up to $15,500 annually to a SIMPLE IRA. The plan also allows individuals 50 years or older to make catch-up contributions of up to $3,500 annually, for a potential total of $19,000.

Employer contribution and matching options

An employer must contribute to eligible employee accounts if offering a SIMPLE IRA. Contributions can be made in one of two ways:

• Matching contributions of up to 3%.
• Non-elective contributions of up to 2%, even if the employee does not contribute.

Compliance and Regulations*

Consider the following when determining if a SIMPLE IRA is right for your organization:

• An employer with a SIMPLE IRA in force cannot have another retirement plan.
• Unlike other qualified plans, there is no discrimination testing required.
• A written agreement is required to set up a SIMPLE IRA, and all employees must be notified annually when the election period will occur.
• Plans cannot permit participants to take out a loan or use the account as collateral.
• Plans must be opened between January 1 and October 1 of a calendar year and can only be terminated once the whole calendar year has passed.

457(b) Deferred Compensation Plans

475(b) Deferred Compensation plans are tax-exempt retirement plans reserved for non-profit employees as well as local and federal government employees. It operates similarly to a 401(k) in that employees can defer a portion of their salary to a retirement account where funds will grow tax-free.

Though 457(b)s are very similar to 401(k)s, a key difference is that a 457(b) is not a qualified retirement plan and thus not subject to Employee Retirement Income Security Act (ERISA) rules.

Tax benefits

One of the defining characteristics that set 457(b) plans apart from other retirement plans is the ability for participants to withdraw from their account without penalty before the age of 59 ½. This is not the case for qualified retirement plans, as early withdrawals are subject to a 10% penalty. Under a 457(b) plan, withdrawals are still subject to income tax.

Employee Contribution limits

Employees can contribute up to 100% of their salary, with an annual contribution limit of $22,500. It also allows two opportunities for participants to make catch-up contributions, another significant difference between this plan and other non-profit retirement plans.

• Participants who are 50 or older will make a $7,500 catchup contribution.
• Participants who are within three years of the retirement age and did not take the maximum deferrals a year prior are eligible to make an additional contribution equal to the contribution limit. That essentially doubles the standard contribution limit.

Employer contribution and matching options

Employers can match employee contributions, though the practice is uncommon. Further, employer contributions count towards the annual limit of $22,500.

Compliance and Regulations*

• Investment options are largely limited to mutual funds and annuities.
• Tax-exempt 457(b) plans, which are used by nonprofits, cannot be structured as Roth accounts, though a Government 457(b) plan can.
• Participation is limited to management or highly-compensated personnel as well as independent contractors.
• Withdrawals against the plan balance are permitted after employees end their professional relationship with the employer.
• Plan loans are not permitted.

*Always refer to the IRS for a full account of the most current regulation and compliance concerns as they relate to any given retirement plan.

Which Retirement Plan Is Right for Your Nonprofit?

No single plan is best for all non-profits, so it’s important to evaluate your organizational needs relating to your internal finances and your effort to attract and maintain talent.

Some plans, like a SIMPLE IRA, are easier to start and maintain, but they lack the high-contribution levels offered by other qualified plans, like a 401(k) or 403(b). Other plans, like a Defined Benefit Pension Plan, may be more attractive to some employees and a useful tool for attaining loyalty, as their pension is guaranteed to the employee and scaled based on the time they stay with the company. Still, a pension plan will require additional labor, such as using an actuary to determine benefits and correlating contributions.

The best thing to do when deciding which retirement plan is best for your nonprofit is to discuss the plan features, regulations, and compliance concerns alongside a professional, like a member of our Horizon Trust team. An experienced expert can evaluate your organizational and potential financial or operational needs.

FAQs: Nonprofit Retirement Plans

Can nonprofit organizations offer both 403(b) and 401(k) plans?

Yes, nonprofits can opt to offer employees both a 403(b) and 401(k) at the same time. Employees can participate in both plans but must stay within the combined contribution limit set by the IRS for that year.

What are the contribution limits for nonprofit retirement plans?

Contribution limits vary by the type of plan adopted by a nonprofit. See the table below for the most current contribution limits based on your plan.

Are nonprofit retirement plans tax-exempt?

Funds growing in a retirement plan are generally tax-exempt while in the account. Tax obligations upon withdrawal depend on the type of plan in question, its structure (Traditional or Roth, when applicable), and the employee’s age.