Guide to Nonprofit Retirement Plans

As seasoned consultants in nonprofit retirement planning, we are here to carry the weight of your team's financial future with you. Your HR or CFO role is pivotal, and choosing the right retirement plan for your dedicated staff is crucial. 

Our expertise spans fiduciary responsibility, investment analysis, and participant education, all tailored to secure your team's future. Let's give them the competitive nonprofit retirement plans they deserve and the education to understand and interact with them.

As we approach the 2024 plan season, you mustn't be just aware but also ahead of the curve regarding the range of options available. But don't fret - that's where we step in! Together, we'll dissect and discuss critical points shaping your decision-making process.

Recently, I had the pleasure of joining Mary Highland on her podcast Inspired Nonprofit Leadership. We delved into the nitty-gritty, like identifying the features your employees desire most, navigating the often complex world of compliance requirements, performing meticulous cost-benefit analyses, and finding efficient recordkeeping & administrative solutions.

With this wealth of information at our fingertips, we can collaboratively carve out a retirement plan strategy that aligns with your organization's culture and ensures it meets its intended objectives. Our goal? Ensure your dedicated employees receive the secure retirement they've earned and deserve.

Remember, you're not alone in this journey. As expert retirement consultants for nonprofit organizations, we’re here to help navigate the path and guide you toward making the best decisions for your nonprofit and, most importantly, your team. 

2024 Nonprofit Retirement Plan Options

• 401(k) Plans: Typically offered by for-profit companies, some nonprofits may offer 401(k) plans. Employees can make contributions from their paychecks before or after tax, depending on the options offered in the plan. Employers can choose to contribute to the plan alongside the employees.

• 403(b) Plans: These are similar to 401(k) plans but are specifically designed for public schools, 501(c)(3) tax-exempt organizations, and other eligible nonprofits.

• Non-governmental 457(b) Plans: These are non-qualified, tax-advantaged deferred compensation retirement plans offered by nonprofit employers.

• Defined Benefit Pension Plans: These provide a fixed, pre-established benefit for employees at retirement. They are the most costly type of plan.

• Cash Balance Pension Plan: The employer contributes to the employee's individual account under the plan, at a set rate and interest credit. The employee will ultimately receive the balance in their account based on contributions plus interest credits.

• SIMPLE IRA Plans (Savings Incentive Match Plan for Employees): This type allows employees to contribute a part of their salary into the plan, which the nonprofit matches up to a certain percentage. An employer contribution is required.

• SEP Plans (Simplified Employee Pension): Under a SEP plan, the employer makes an equal percentage contribution directly to an individual retirement account (IRA) set up for each eligible employee.

• Payroll Deduction IRAs: Even if an employer does not want to adopt a retirement plan, employees can contribute to an IRA through payroll deductions, providing a simple and direct way for eligible plan participants to save. NOTE: Some states now require a payroll-deducted IRA or have pending legislation requiring it.

It is common for employers, particularly in the nonprofit sector, to contribute to retirement plans. The most prevalent match is dollar for dollar up to four percent, meaning the employer matches the employee's contribution up to 4% of their compensation.

Another standard method is for the employer to contribute three percent to all employees, regardless of whether they contribute themselves. The majority of nonprofits typically make some form of contribution, according to the PlanSponsor 2023 Defined Contribution Plan Industry Survey.

401(k) Plans

The 401(k) plan - the most widely offered retirement plan option - is not exclusive to the for-profit business sector; it's also accessible to non-profit organizations.

401(k) plans have the most flexibility for eligibility, entering the plan, and formulas for employer contributions.

Matching or making a non-elective contribution to the plan can significantly accelerate the growth of your employees' financial goals over time and enhance your reputation as a supportive employer.

403(b) Plans

The 403(b) plan is a retirement savings option akin to the more familiar 401(k) plan but specifically designed for the non-profit sector. It has universal availability, meaning you have to offer it to all your employees, with minor exceptions.

As an employer, you can automatically allow eligible employees to deduct a portion of their paycheck into this account. The contributions can be pre-tax, which can help reduce the employee's taxable income for the year, or after-tax (Roth contributions). Like a 401(k), you may match a percentage of your employees' contributions, thereby boosting their savings.

Which is better: 403(b) plan vs 401(k)

A 403(b) plan and a 401(k) plan are employer-sponsored retirement savings plans that allow your employees to contribute a portion of their paycheck to a retirement fund with special tax advantages, and allow for the employer to contribute.

There are a few key differences between the two plans. One major distinction lies in the available investment options. In a 401(k) plan, your employees can invest in individual stocks, bonds, mutual funds, and Collective Investment Trusts (CITs).

On the other hand, with a 403(b) plan, the investment choices are typically limited to mutual funds and annuities. (Recent legislation may change this.) Another difference is in the regulations each plan follows. For instance, 403(b) plans are exempt from some of the nondiscrimination testing that 401(k) plans are subject to, and they often have different reporting requirements.

In essence, both plans aim to help employees save for retirement. Determining the most suitable one for your organization will take into account a number of variables and the investment preferences of your employees. Offering such a plan can enhance your benefits package and aid in attracting and retaining quality staff.

Non-governmental 457(b) Plans

The 457(b) plan for nonprofits is a pre-tax, deferred compensation plan in addition to your 401(k) or 403(b), limited to a select group of management or highly compensated employees. These are typically key management. (Note: 457(b) plans maintained by non-governmental tax-exempt entities are very different from governmental 457(b) plans!)

This plan type can be offered by nonprofits to attract and retain senior leadership roles as well as provide the board with an additional opportunity for incentive pay.

Defined Benefit Pension Plans

Defined Benefit Pension Plans offer a unique retirement savings option where the benefits your employees will receive in their retirement years are predetermined or set based on a formula.

Unlike other plans where retirement savings depend on individual contributions and investment performance, with a Defined Benefit Pension Plan, your employees know what they will receive upon retirement. The benefit amount is typically calculated based on factors such as salary, age, and tenure at the company.

For instance, it may state that after working for the organization for 30 years, an employee will receive 50% of their final salary annually. If an employee retires with a salary of $80,000, they'll receive $40,000 annually during their retirement — for as long as they live.

This type of plan provides a degree of certainty for the employees, making retirement planning less stressful for them, knowing that a specific income awaits them. Employees who feel valued and cared for through a robust benefits package will likely be more engaged, motivated, and productive.

On the flip side, it is literally The. Most. Expensive. plan that an organization can offer and the organization bears all of the risk for keeping the plan funded.

Cash Balance Pension Plans

Cash balance plans are a type of defined benefit pension plan. It promises an employer contribution made each year based on a participant’s annual compensation plus a guaranteed interest credit.

The final amount available at retirement under this plan isn't pre-determined or “defined.” Rather, it's influenced by the total contributions and interest credits made over time. When a participant terminates employment, they are eligible to receive the vested portion of their account balances or use the amount to buy an annuity with guaranteed payments.

Organizations have some flexibility in how these types of plans are designed, and they are often a cheaper alternative to a defined benefit pension plan or as a companion plan to a 403(b) or 401(k).

SIMPLE IRA Plans (Savings Incentive Match Plan for Employees)

The Savings Incentive Match Plan for Employees, or SIMPLE IRA Plan, is an excellent retirement savings option for your employees, especially if you run a small nonprofit organization. In a word, the SIMPLE is…simple.

In this plan, your employees can allocate a portion of their salary pretax to be automatically deducted and contributed towards the SIMPLE IRA. A key advantage of this plan is the requirement for you, the employer, to either match employee contributions up to 3 percent or make a nonelective contribution of 2 percent.

However, this plan is both very easy and inexpensive to administer!

SEP Plans (Simplified Employee Pension)

A Simplified Employee Pension Plan, or SEP Plan, is a retirement savings plan where only the employer contributes to the employees' retirement accounts. 

These contributions are directly deposited into a SEP Individual Retirement Account (IRA) for each eligible employee. Small businesses and self-employed individuals often choose this type of plan due to its simplicity and flexibility.

Let's illustrate this with an example. Suppose you implemented a SEP Plan. At the end of the fiscal year, you decide to contribute 5% of each employee's salary into their respective SEP IRAs. If an employee's annual salary is $60,000, you would deposit $3,000 (5% of $60,000) into their SEP IRA. These funds are not taxed to the employee until withdrawn at retirement, allowing them to grow tax-deferred over time.

It's important to remember that the contribution rate must be the same for all employees in the company. In this scenario, if you contribute 5% to one employee, you must do so for all.

Payroll Deduction IRAs

A Payroll Deduction IRA offers a straightforward solution for your employees to save for retirement without having a group plan sponsored by the organization.

This type of plan enables employees to have a part of their salary automatically deducted from their paycheck and deposited into an Individual Retirement Account (IRA). It's a convenient method for consistent retirement saving without manual contributions, and the American Retirement Association has research to support that an employee is 12-15 times more likely to save for retirement when they have access to a retirement plan at work.

Here's an example of how it functions: Imagine you run a small business that doesn't provide a company-sponsored retirement plan. However, you do offer the option for a Payroll Deduction IRA. An employee chooses to contribute 6% of their monthly income to this IRA. If their monthly income is $3,000, $180 will be automatically deducted from their monthly paycheck and deposited into their IRA.

It's important to note that some states now require employers to offer a payroll-deducted IRA if they don't provide a retirement plan or have legislation pending to mandate this. These laws aim to assist more workers in saving for retirement, particularly those employed by smaller businesses. 

Which states have passed retirement mandates as of November 2023? Go here to check and when they take effect.

Unlock the Complexities of Nonprofit Retirement Plans

Navigating the world of nonprofit retirement plans can seem like a daunting task, with a plethora of options from 401(k), 403(b), and 457(b) plans to defined benefit pension plans, defined contribution plans, SIMPLE IRA plans, SEP Plans, and payroll deduction IRAs. 

Each has its considerations, including eligibility requirements, contribution limits, vesting periods, administrative costs, and investment flexibility. 

The key is to conduct thorough research that will empower your organization to make informed decisions for your employees' future financial prosperity. If this process seems overwhelming, we’re here to help! 

At Retirement Planology, we work as plan advisors to help nonprofits like yours navigate the complexities of retirement planning with top-tier service at an affordable cost. Want to ensure your employees have a secure retirement? Let's start the conversation today!