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Finding energized, qualified, and skilled staff members to help non-profit organizations enhance existing programs, deliver additional services, and facilitate needed fundraising can be difficult. Although the focus on service is what attracts many to work at an organization, there also needs to be reasonable compensation and benefits offered as well. Since many organizations are unable to match salaries offered by their for-profit counterparts, it makes secondary benefits such as employer-provided health insurance and retirement plans important. Many management teams face the challenge of determining the correct type of insurance or retirement plan to offer. In terms of retirement plans, most tax-exempt organizations provide their employees with a tax-deferred 403(b) plan. This plan type is very similar to the better-known 401(k) plan, but they are exempt from certain administrative duties required of 401(k) plans. To help clients, prospects, and others, JLK Rosenberger has provided a list of common questions asked about these plans below.
403(b) Plan Questions
What is a 403(b) plan?
It is a tax-sheltered annuity plan, or retirement plan, for certain employees of public schools and 501(c)(3) tax-exempt organizations, including charities and associations. This plan promotes retirement savings by allowing employees to defer a portion of their salary as a contribution to the plan. Although not required, employers may also elect to make contributions for the employees. Generally speaking, only tax-exempt organizations, churches, and public schools can offer this plan type.
When can an employee join a 403(b) plan?
The terms of the plan determine when an employee is eligible to enroll. Typically, there is a requirement for the number of hours worked or the amount of time with an organization. In general terms, a plan is required to allow all eligible employees to participate based on the employment commencement date (universal applicability rule). An automatic enrollment feature can be implemented, assuming the plan allows for employee contributions, there is an automatic enrollment provision in plan documents, and the employee does not opt-out of the election.
Can an employer exclude any employee from contributing?
A 403(b) plan must generally allow all employees to make elective deferrals to the plan. Under the universal availability rule, if an employer allows one employee to defer salary by making contributions, the employer must extend this offer to all employees. There are a few exceptions, including those who contribute $200 or less, those who participate in 401(k), 457(b), or in another 403(b) plan, nonresident aliens, and employees who normally work less than 20 hours per week.
What type of contributions can be made to a 403(b) plan?
There are three types of contributions, or elective deferrals, which can be made to a 403(b) plan.
- Elective deferrals – These are employee contributions made under a salary reduction agreement. This permits an employer to withhold money from an employee’s salary and deposit it into the employee’s 403(b) account.
- Nonelective employer contributions – This includes matching contributions, discretionary contributions, and qualifying mandatory contributions made by the employer. It’s important to note that employees pay income tax on these contributions only when withdrawn.
- After tax contributions – These are contributions made by an employee, which are reported as compensation in the year contributed and is included in the employee’s gross income for income tax purposes.
Does the employer have to contribute to a 403(b) plan for employees?
No, an employer may, but is not required to contribute to the plan for employees.
How are 403b plan assets invested?
Assets laced in a 403(b) plan can be invested in: an annuity contract provided through an insurance company, a custodial account invested in mutual funds, or a retirement income account established for church employees.
Can employees take a loan from their 403(b) account?
Yes, a 403(b) plan may, but is not required to, allow participants to take loans. If permitted, an employee may take a loan in accordance with plan regulations.
What is the written plan requirement?
A 403(b) plan is required to be maintained under a written program that contains all the plan terms, including conditions for eligibility, benefits, limitations, form, and timing of distributions and contracts available under the plan. Finally, it also specifies the party responsible for plan administration. Note that all the provisions do not need to be included in a single plan but across several plan documents.
Does a 403(b) plan require an ERISA audit?
Under regulations issued by the U.S. Department of Labor on November 16, 2007, 403(b) retirements covered under the Employment Income Retirement Security Act of 1974 (ERISA) are subject to annual reporting requirements. Plans with more than 100 or more participants are typically required to file audited financial statements. Those with less than 100 participants are often eligible to use an abbreviated method without audited financial statements.
Can an employer terminate a 403(b) plan?
Yes, assuming the rules and regulations outlined in Treasury Regulation Section 1.403(b)-10 are followed.
A retirement plan is an important benefit organizations should consider offering as part of the employee benefits package. However, it’s essential to be aware of the rules, regulations, and costs associated with plan management. If you have questions about the information outlined above or need assistance with a plan audit issue, JLK Rosenberger can help. For additional information, call us at 972-331-5917 or click here to contact us. We look forward to speaking with you soon.