🔍
Retirement Plans For Nonprofits: 403(b), 401(k), or Something Else? - YouTube
Channel: Approach Financial
[0]
Nonprofit organizations can be rewarding
to their employees in several ways — not
[4]
only do they feel good about what
they're doing, but they can also have
[7]
benefits like traditional 401k plans and
403 B plans. So which types of plans
[13]
might be right for your organization, and
which ones can help you manage your
[16]
costs as you run the plan? Hi, I'm Justin
Pritchard and we're going to cover
[21]
several nonprofit retirement plan
options including 403 B plans 401 k
[27]
plans and other types of plans that
might help you manage expenses and help
[31]
people save for retirement — and
potentially manage their taxes. In the
[35]
past 403 B plans got all the
attention for nonprofit organizations
[38]
and that was for good reason. But over
the years, the rules have changed so that
[43]
nonprofits can use other types of
retirement plans as well, and it may even
[47]
make more sense to do so. So we will get to some of the unique
[51]
pros and cons of having a 403 B plan but
we'll also talk about other options that
[56]
might make sense for your organization. And as a quick overview we can look at
[60]
how 401 k plans and 403 B plans compare
and contrast so you get an idea of why
[65]
403 B isn't quite as popular as it used
to be. Number one is that 401 k plans and
[71]
most 403 B plans nowadays (for private
nonprofits we're talking here for the
[76]
most part) both of those plans need a
written plan document and they
[81]
essentially look and feel like a 401 k
plan. So number two, there are more 401k
[86]
providers out there then there are 403 B
providers the result is that you have
[91]
more competition and you know typically
that brings down the pricing on 401 k
[96]
plans compared to 403 B plans where you
don't have quite as much choice. The last
[102]
thing is that not every not-for-profit
organization is able to have a 403 B
[108]
plan. So you've got 501 C 6 trade groups
for example they can't have a 403 B so
[115]
they might have a 401 K anyway the good
news is that employees can save quite a
[120]
bit of money in both 401 k plans and 403
B plans if they choose to do so.
[125]
So both types of plans have the maximum
$19,000 of salary deferral
[130]
in 2019 and that should change in
future years with inflation. Those over
[136]
age 50 also have an additional catch-up
contribution available to them of $6,000
[142]
again that could change over the years
and the total contributions that go into
[146]
an employee's account can be as high as
fifty-six thousand dollars for 2019 so
[151]
that would include the employees own
contributions out of their pay as well
[156]
as any employer money that comes in on
top of the employees contributions. So
[160]
those are some meaningful amounts! The
one caveat is that 403 B plans may have
[166]
an additional catch-up contribution for
certain employees and we'll talk about
[170]
that a bit later. Some other similarities
include the ability to make either after
[175]
tax or pre-tax contributions to the plan. So
if the plan allows it, if the employer
[180]
sets this up, employees can make
after-tax Roth contributions if they
[185]
choose to do so or they can make pre-tax
you might call "traditional" contributions
[189]
or they can mix and match and make some
combination of both. What's more, there
[194]
may be loans and hardship distributions
available from both types of plans. Again
[200]
these are options that the employer can
add but doesn't have to offer. One
[205]
potential drawback for nonprofit
organizations who are often concerned
[210]
about cost might be the administrative
costs of running a 401 k plan as well as
[215]
some of the employer contributions that
might be required. So it can you know
[219]
maybe cost a couple thousand dollars to
run a 401 k plan. For a lot of
[223]
organizations that's not an option. The
board of directors is concerned about
[227]
directing those funds towards the
mission and they don't necessarily want
[231]
to pay administrative expenses maybe on
top of even contributing to employee
[236]
accounts so that can be a challenge if a
non-profit wants to offer a 401k or 403b
[242]
plan in some cases. What you should know
as a quick overview about 401 k plans is
[248]
that sometimes they have discrimination
tests that mess up what you think your
[252]
budget is going to be for the year or
what an employee thinks that their
[256]
contribution is going to be for the year. So for example if somebody is trying to
[260]
contribute a lot of money but others in
the plan are not contributing quite as
[264]
much it can restrict an employee's
ability
[267]
to make the full contribution at full
$19,000 for example or if plan assets
[273]
kind of stack up in too "heavy" a way then
that can require the organization to
[279]
make a contribution of three percent —
what might be called a top-heavy
[282]
contribution to the plan. And if the
organization doesn't expect that, that's
[287]
obviously not a great thing. So 401k
plans are pretty powerful but you need
[294]
to be aware of the pros and cons of
using a 401k plan. The good news is that
[299]
there are less expensive options out
there and they have pros and cons of
[303]
course. One of them that you might
want to look at is a SIMPLE plan. It's
[307]
called a SIMPLE which is an IRA-type of
plan stands for Savings Incentive Match
[312]
Plan for Employees, and what that does,
this helps people save, again, quite a bit
[317]
of money each year if they choose to
contribute that of their pay into the
[321]
plan they can save up to $13,000 per
year in 2019, and those employees over
[328]
age 50 can make an additional $3,000
catch-up contribution on top of the
[333]
$13,000. So what do you need to know
about SIMPLE plans? A couple of things.
[337]
Number one is there is no option to make
Roth contributions so if somebody wanted
[342]
to make those after-tax Roth
contributions they just can't do it in a
[346]
simple plan it's all going to go in
pre-tax and then eventually have income
[350]
taxes on it when it comes back out
another thing to know about is that
[354]
there are no loans in simple plans so
again a whoreo 1k or 403b
[359]
if the employer offers it can allow
somebody to borrow up to $50,000 or 50%
[365]
of their best at account balance
whichever is less but a simple does not
[370]
offer and another thing to know about is
that simples have basically immediate
[374]
vesting so when the money goes in it
technically goes into an IRA account an
[379]
individual retirement account in the
employees name at that point they can
[383]
take the money right back out
immediately if they want to that may or
[387]
may not be a problem but if you did want
to encourage people to keep their money
[391]
saved for the long term or if you want
to give an incentive for people to stay
[397]
with the organization for several years
then that ability to take the money
[401]
right back out is a little bit different
than what you have in a 401k plan and
[405]
finally you can only have a simple plan
in a given year you can't also have a
[410]
401k plan in that same year so if you
decide to switch to a 401k plan let's
[416]
say after having a simple plan you need
to plan you need to plan ahead to make
[421]
sure that they don't run over each other
and cause any problems so let's start
[426]
about costs what does it cost to run a
simple plan it's essentially just the
[431]
contributions that you make for
employees so that might be one of two
[436]
choices that you have you can either
give 2% of the employees compensation
[441]
each year that just goes to the employee
whether they contribute or not the other
[447]
option is to give a 3% match on what the
employee contributes so if they
[452]
contribute zero then nothing goes in
from the employer but if the employee
[456]
contributes 3% they basically get a
hundred percent match on that if they do
[462]
10% you're only going to match them up
to three percent of their compensation
[466]
and in very limited cases you can reduce
that just a little bit in certain years
[471]
but don't count on that plan on doing
either the 2% contribution or the 3%
[477]
match other than that there are no
administrative costs really with a
[482]
simple plan it's really just the time it
takes for you to enroll employees maybe
[488]
communicate to them about the plan deal
with it in payroll making sure that it
[493]
gets over to the vendors correctly but
there isn't like an actual hard dollar
[498]
cost that you pay to run a simple plan
in your organization so that's appealing
[502]
to a lot of nonprofits especially small
nonprofits with limited funding a
[508]
payroll deduction IRA is another option
and that's another step down in terms of
[513]
how much you can contribute each year to
the plan as well as any costs to the
[518]
employer so a parallel deduction IRA is
kind of what it sounds like you just set
[523]
up I arrays for people or have them do
it and then you contribute out of their
[527]
pay into their own IRA it's not really
an employer-sponsored plan that requires
[532]
an employer contribution like a matching
contribution
[535]
or a profit-sharing contribution or
anything like that
[538]
it's just a way to make it easier for
employees to save money into the plan
[544]
sometimes all it takes is making things
easier and people take the right actions
[549]
if you can just give them a road map to
save some money they will end up saving
[554]
some money and that's what a payroll
deduction IRA does very well so the
[558]
costs again are basically just the
administrative tasks of dealing with the
[562]
contributions you know talking with
employees about it if you talk with them
[567]
you definitely don't give investment
advice if you're not licensed to do that
[570]
but you can let them know how the basics
work that you have a plan that takes
[575]
money out of their page and then goes
over to a vendor and over there the
[580]
employee can choose certain investments
if they want to do that the good news
[584]
for employees is that they can make
either pre-tax traditional or Roth
[590]
contributions now whether or not they're
eligible to do so is a question and
[595]
that's something that each employee
needs to verify for themselves so in a
[599]
401k for example it's a little bit
different you know anybody who's
[602]
eligible to contribute can make Roth
contributions up to $19,000 and that's
[607]
very simple and easy for people to
understand but in an IRA they might not
[613]
be allowed to make Roth contributions
they might not be able to make pre-tax
[617]
contributions or they might not be able
to deduct those contributions on their
[622]
tax return they should typically be able
to at least make a contribution and
[626]
whether or not it's broth or deductible
or not it's going to be a question for
[630]
their CPA so it does put a little bit
more work on employees they need to be
[635]
just a little bit more engaged but at
least you're getting the money out of
[639]
their pay and into their retirement
account before they have the chance to
[643]
spend it and that is a lot better than
nothing another thing to know about
[648]
those payroll deduction IRAs is that
it's not automated so you're not going
[653]
to reduce the w-2 that says you put in
this much to the plan and therefore your
[658]
taxes are lower again the employee needs
to deal with that all on their own some
[662]
good news though is that there is no
discrimination testing you're not going
[666]
to have
look at how much each person contributed
[669]
compared to some of the other employees
and did they contribute too much or not
[673]
that is the case with a 401k plan you do
need to typically look at who's
[678]
contributing how much are they putting
in and is there any disparity that the
[682]
IRS doesn't like that gets really
complicated we can talk about that
[686]
another time but that doesn't happen
with the payroll deduction IRS order
[691]
simples and another thing to just be
aware of with the payroll deduction I
[695]
erases again it's an IRA so the
employees effectively 100% immediately
[700]
bested and it is their own money so why
shouldn't they be it just came right out
[704]
of their pay and they put it in the
account so they can take the money right
[707]
back out whenever they want to and
before we get to the 403b specifics just
[713]
want to mention that there are some
other options out there they're not the
[717]
ones that most small nonprofits are
looking for these might make more sense
[721]
to organizations that have highly paid
employees really highly paid employees
[725]
or huge cash flows coming through so
they can afford to make large
[730]
contributions for employees and those
would include a defined benefit plan or
[734]
a non-qualified deferred compensation
plan maybe a 457 half so those are
[740]
options for a limited subset of
not-for-profit groups okay before you
[747]
rule out a 403 B plan you might want to
know at least what makes them unique and
[751]
should you maybe try one out instead of
using a 401k plan so what makes 403 b's
[757]
unique and one of them is that there's
not as much discrimination testing and
[762]
that kind of depends on the organization
and are you gonna make any employer
[766]
contribution or not but you can really
lighten the load on the discrimination
[771]
testing if you have a 403 B with no
employer contribution now what does that
[777]
mean in plain English essentially that
means that if you have highly
[781]
compensated employees who are trying to
contribute a lot in to the plan and then
[785]
you have rank-and-file employees who
don't earn as much and they choose not
[788]
to contribute to the plan sometimes that
can cause problems which disqualifies
[794]
the highly compensated employees from
making as big of a contribution as they
[798]
want to so they can't save as much as
might want or need for retirement and
[802]
that frustrates them they might get
refunds from the plan it's inconvenient
[807]
dealing with their taxes so if you can
eliminate those discrimination tests
[812]
that you know may be beneficial for your
organization something else that's
[817]
unique to 403 B plans is the additional
catch-up contribution so this may be
[823]
hard to qualify for but in the right
cases it can be helpful so employees who
[828]
have been employees of the organization
for over 15 years may be able to
[832]
contribute an additional $3,000 per year
now this gets pretty tricky I'm going to
[837]
read off the list here because your
organization has to be a public school
[841]
system hospital home health service
agency health and welfare service agency
[847]
a church or a convention or Association
of churches or associated organizations
[851]
so not every nonprofit fits that
criteria not every employee has been
[856]
there for 15 years and then there are a
couple of other things that you know you
[860]
need to tick off certain check boxes but
if it works well for your organization
[865]
then maybe 403 B makes sense
okay another benefit for using a 403 B
[871]
for some organizations that you can make
it a non ERISA plan and essentially that
[876]
means you don't follow certain rules and
regulations related to retirement plans
[880]
and we're not talking about you get to
do a bunch of illegal stuff but the
[884]
administrative burden is a lot easier
you don't have to file certain forms and
[888]
returns it just it makes it
administrative Liese err on the
[892]
organization and time is always at a
premium so that's helpful again not
[897]
every organization not every nonprofit
is going to be able to do that
[901]
especially if you do make an employer
contribution like a matching
[904]
contribution for example that would
disqualify you
[908]
but that's one potential benefit and
beyond that there are a couple of other
[913]
differences that you get really into the
details and 403 B plans have you know
[918]
one or two just weird things that apply
to certain subsets of groups for example
[922]
administers housing allowance might be
right if you have a religious
[926]
organization or post severance pay for
certain employees who terminate
[930]
employment but you still want to make
contributions to their account
[934]
these aren't things that are typically
appealing to most again small private
[938]
nonprofits that are you know just doing
things in the community but in some
[943]
cases they can be you know nice for
helping people save for retirement so I
[948]
hope that helps you get an idea of what
options are available to your
[952]
organization whether it's 401k plans
simple payroll deduction IRA or even a
[958]
403b plan you've got lots of different
choices you can pick on how expensive
[963]
it's going to be in terms of
administrative costs and in terms of
[967]
contributions to employee accounts you
can sort of pick a plan that makes the
[971]
most sense for you if you have any
questions on that please let me know I'd
[975]
be happy to talk with you and we can
make sure you get the plan that you need
[987]
you
Most Recent Videos:
You can go back to the homepage right here: Homepage