Is a 401(k) OK for Your Nonprofit?

Now that 401(k) retirement plans are available to tax-exempt employers, you may be deciding whether to keep your 403(b) plan or switch to a 401(k). 401(k) plans are different from 403(b) plans, but they are not necessarily better, so examine the two carefully before making a decision. Some organizations may not even have to choose -- 403(b) plans are only available to 501(c)(3) organizations. Let’s look at the pros and cons of the 401(k) vs. 403(b) retirement plans.

401(k) Advantages
A benefit of 401(k) plans is that they can accept contributions rolled over from other qualified plans. 403(b) plans can only accept rollover from other 403(b) plans.

Another benefit is that 401(k) plans allow for self-directions so that individual stocks and other assets can be purchased. There are some limitations on investments by 403(b) plans -- generally, only annuity contracts or mutual funds are allowable investments.

403(b) Advantages
A primary advantage of employee-contribution 403(b) plans is that the tough nondiscrimination rules of ERISA do not apply. The top-heavy restrictions and uniform contributions requirements of ERISA do apply to 401(k) plans.

Another advantage of the 403(b) plan applies if another retirement plan is in place. Employee contributions to a 403(b) plan are not added to the overall plan contribution limits of Code Section 415. Employee contributions to 401(k) plans are subject to this requirement.

Examine Your Options
What to do? If you already have a 403(b) plan in place, a 401(k) plan may not offer enough advantages to merit change. If you are considering installing a plan, however, carefully examine the benefits of each.