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403(b) Plans: Setting Up a Retirement Plan for Your Nonprofit Organization

403(b) Plans: Setting Up a Retirement Plan for Your Nonprofit Organization

Last Updated: December 19, 2023

Both 401(k) plans and 403(b) plans are employer-sponsored retirement plans, but there are key differences between the two plans that are important to highlight.

Simply put, a 403(b) plan is a type of retirement plan that originates with and is only allowed to be offered by nonprofits. This includes 501(c)(3) organizations, religious institutions, and government entities such as public schools. Like any other retirement plan, it’s a way for employees to save for retirement in a tax-advantaged way.

In this article, we’ll cover the key attributes of 403(b) retirement plans, including their advantages and disadvantages and how they compare to 401(k) plans.

What is a 403(b) plan?

A 403(b) retirement plan is a type of tax-advantaged retirement savings account available to employees of certain tax-exempt organizations, such as schools, hospitals, and nonprofit organizations. Employees can make contributions from their salary on a pre-tax or Roth (after-tax) basis:

  • Pre-tax or ‘traditional’ contributions are deducted from their salary before taxes are applied, thereby reducing their taxable income. The funds in a pre-tax 403(b) plan grow tax-free until they are withdrawn during retirement, at which point they are subject to income tax.
  • Roth contributions are deducted from their salary after taxes are applied, however in most cases these funds are withdrawn tax-free during retirement.

How does a 403(b) plan work?

A 403(b) plan works much like a 401(k) plan. Once an employee selects the amount they would like to contribute to their 403(b) account, their employer’s payroll system deducts that percentage or dollar amount from each paycheck during the payroll period.

Additionally, some plans offer an “employer match,” which means the employer will contribute to their employees’ accounts based on how much they contribute, up to certain limits established by the IRS or their plan document. For example, if a plan has a match up to 4% of the employee’s salary and an employee is contributing 3% of their salary, then the employer will also contribute 3%. If the employee is contributing 5%, then the employer will contribute 4%.

Finally, some plans will offer non-elective contributions. These are provided, usually in a pro-rata amount (such as 4% of annual salary, for example) to all employees whether they contribute to the plan or not.

When considering a 403(b) plan, employers should consider the needs of their particular workforce before deciding on a plan. Creating an employee benefits survey can be a good way to determine which type of retirement plan your employee base would prefer.

How much can an employee defer into a 403(b) plan?

The deferral limits for a 403(b) plan are typically adjusted for inflation each year. For 2024, an employee can defer up to $23,000 of their pay into a 403(b) or 401(k) plan.

Additionally, if permitted by the 403(b) plan document, employees who are age 50 or over at the end of the calendar year can also make catch-up contributions of $7,500 in 2024 beyond the basic limit on elective deferrals, for a total of $30,500.

What are the advantages and disadvantages of a 403(b) plan?

Advantages of a 403(b) plan

  • Recruit & retain: Offering a 403(b) plan gives nonprofits the ability to compete with private sector businesses for the talent they need to make their mission statements a reality.
  • Tax benefits: 403(b) plans allow you to either lower your taxable income today with pre-tax contributions or enjoy tax-free withdrawals in retirement by making Roth contributions.
  • Simplified compliance: Because 403(b)’s are created for the nonprofit sector, they have fewer compliance regulations for parity than a 401(k) has. This presents a streamlined option as there is less administrative work at the end of the year.

Disadvantages of a 403(b) plan

  • Brand recognition: While the laws governing 401(k) and 403(b) plans have made them more similar, the 403(b) remains a far lesser-recognized plan offering. Particularly for organizations seeking workers from the private sector, they may have to explain that the plans are remarkably similar in savings, benefits, and features.
  • Universal availability: a 403(b) plan must generally be offered to all employees in the organization. This means that if you are considering employer contributions you should consider that they will be offered to all employees. This is a difference from 401(k) plans that can choose to exclude certain employees based on certain criteria.

Is a 403(b) plan right for your nonprofit?

A 403(b) plan is a powerful tool for nonprofits to attract and retain talent while giving their employees the ability to save for retirement at tax-advantaged rates. Additionally, they are easier to operate from an administrative perspective relative to a 401(k) plan.

When offering a 403(b) plan, employers should understand their objectives, know the retirement trends within their industry, and invest in employee communication and education to show their employees the benefits of their retirement plan. The good news is, you don’t have to do it alone.

Vestwell is a digital retirement plan platform that makes it easier for you to offer and administer an employer-sponsored 401(k) or 403(b) plan. By combining technology with user-first design and offering 3(16) plan administration services, Vestwell can help you take the hassle out of setting up and administering a 403(b) plan.