Retirement Plan Options for Small Nonprofits

Offering a retirement plan helps small nonprofit organizations attract and retain dedicated employees. In a competitive labor market, a retirement benefit can be a deciding factor for individuals committed to a mission-driven career. While many nonprofit leaders assume such benefits are beyond their financial reach, several retirement plan options are designed for the operational and budgetary realities of tax-exempt organizations. These plans provide a tax-advantaged way for employees to save for their future, reinforcing financial wellness and commitment to the organization.

The 403(b) Plan Option

The 403(b) plan is a retirement savings vehicle available to employees of 501(c)(3) tax-exempt organizations. Often seen as the nonprofit equivalent of the 401(k) plan, it allows employees to contribute a portion of their salary on a pre-tax basis, which lowers their current taxable income. These funds then grow tax-deferred until they are withdrawn in retirement, at which point distributions are taxed as ordinary income.

A 403(b) plan accommodates both employee and employer contributions. Employees can make elective deferrals from their paychecks up to an annual limit set by the Internal Revenue Service (IRS). The employer has the option, but not the obligation, to contribute to employee accounts. These employer contributions can be structured as a match, where the nonprofit contributes based on what the employee saves, or as a non-elective contribution, where the organization contributes to all eligible employees’ accounts regardless of their own savings.

Many 403(b) plans also offer a Roth contribution feature. Unlike traditional pre-tax contributions, Roth contributions are made with after-tax dollars, meaning they do not lower the employee’s current taxable income. The advantage is that qualified withdrawals in retirement are completely tax-free. This option provides employees with tax diversification, allowing them to choose the tax treatment that best fits their anticipated financial situation.

Historically, investment choices within 403(b) plans were limited to annuity contracts. While annuities remain an option, most modern 403(b) plans now also offer a wide array of mutual funds. This provides employees with greater flexibility to build a diversified investment portfolio that aligns with their risk tolerance and retirement timeline.

IRA-Based Plan Options

For nonprofits seeking simpler administration, retirement plans based on Individual Retirement Accounts (IRAs) present an alternative. These plans have fewer complex compliance and reporting requirements compared to 403(b) plans. The accounts are established for each eligible employee and are owned and controlled by them, offering a straightforward approach to retirement savings for smaller organizations.

SEP IRA

The Simplified Employee Pension (SEP) IRA is funded exclusively by the employer. Under a SEP plan, the nonprofit makes contributions to traditional IRAs set up for its employees. An advantage of this plan is its contribution flexibility; the employer can decide each year whether to contribute and can vary the amount, up to a limit of 25% of an employee’s compensation or a maximum dollar amount that is adjusted annually by the IRS. This adaptability is beneficial for organizations with fluctuating revenues, as there is no mandatory contribution in a given year.

SIMPLE IRA

The Savings Incentive Match Plan for Employees (SIMPLE) IRA allows for contributions from both the employee and the employer. Employees can elect to contribute a portion of their salary up to an annual limit, and the employer is required to make a contribution. The nonprofit has two choices for its mandatory contribution: it can either match the employee’s contributions dollar-for-dollar up to 3% of their compensation or make a non-elective contribution of 2% of compensation for every eligible employee. This required employer funding represents a fixed cost for the organization.

Key Factors in Selecting a Plan

The organization’s budget is a primary consideration. A SIMPLE IRA’s mandatory contribution creates a required annual expense, while a SEP IRA offers discretion to adjust contributions based on revenue. A 403(b) plan provides a middle ground where employer contributions are optional.

Administrative burden and associated costs are also important. IRA-based plans are easier and less expensive to manage, which can be an advantage for a small nonprofit with limited staff. The savings objectives of the employees should also influence the decision, as a 403(b) plan allows for higher employee deferral limits than a SIMPLE IRA, which may be a priority for staff who want to save aggressively for retirement.

Establishing and Maintaining Your Plan

Establishing a plan requires careful attention to procedural detail to ensure it operates in compliance with all applicable regulations. The first step is to select a financial institution to act as the plan provider or custodian. The nonprofit’s governing body must then formally adopt a written plan document that outlines the specific rules of the plan, including eligibility requirements, contribution formulas, and distribution procedures. Finally, the nonprofit must provide a clear notification to all eligible employees, explaining the plan’s benefits and enrollment process.

Ongoing responsibilities include processing employee enrollment forms and accurately depositing all contributions in a timely manner. For plans with employer contributions, this means calculating and remitting those funds according to the terms of the plan document. Most 403(b) plans require the annual filing of a Form 5500 with the Department of Labor to report on the plan’s financial condition and operations.

Throughout the life of the plan, the nonprofit and its leaders assume a fiduciary duty. This legal obligation requires them to act solely in the best interest of the plan participants and their beneficiaries. This includes prudently selecting and monitoring investment options, ensuring plan expenses are reasonable, and making decisions with care and diligence.