Retirement Plans for Nonprofit Organizations

There are other types of retirement plans available to nonprofit organizations that may have fewer fees than a 403(b) plan a greater diversity of investment choices, or both. Some of the options include 401(k) plans, Savings Incentive Match Plans for Employees, and Payroll Deduction IRAs. The features and benefits associated with each of these options vary. And there still may be cases when a 403(b) remains the right choice for your organization. But it’s a good idea to be familiar with all of the options available to nonprofit organizations.

Here’s a closer look at the various retirement plans available and some of their benefits and drawbacks. 

403(b) Plans for Nonprofits

In many ways, a 403(b) plan is similar to the widely used 401(k) plan. To begin with, offering a 403(b) plan allows employees to set aside some of their salaries each pay period in individual retirement accounts, and the money is allowed to grow tax-free until it's withdrawn.

Like many other retirement plans, the Internal Revenue Service (IRS) sets annual contribution limitations for 403(b) plans. For 2024 those limits are $23,000—meaning elective salary deferrals cannot exceed that amount. Those who are 50 and older, however, can make catch-up contributions of up to $7,500 when using a 403(b) plan.

However (and this is an important distinction) the investment options available through 403(b) retirement accounts are typically more limited than the options associated with some other retirement savings plans. Generally, 403(b) account investments are limited to annuities and mutual funds. While other retirement plans (which we'll cover next) may provide broader investment choices for participants.

Also worth noting, 403(b) plans typically do not feature the capability for employers to provide matching contributions to employee accounts, while other retirement savings plans do offer this benefit as a standard component of the plan.

The fees associated with 403(b) plans are also a drawback to consider. A 2022 study from the U.S. Government Accountability Office, for instance, found that the expense ratios for the annuities and mutual funds that are part of 403(b) plans can be significant. The report shows that fees range from about 0.01% to 2.37%. That amounts to investments costing up to 237 times more than other, lower-cost retirement plans. Additionally, there may often be surrender fees, or fees for selling or withdrawing money from an investment within a set period of time, charged when investing in annuities in a 403(b) account. Surrender fees can be as much as 10%.

401(k) Plans for Nonprofits

The most widely offered retirement plan option, 401(k) accounts allow employees to make pre-tax payroll contributions from their paychecks each pay period in the same manner as 403(b) plans. And like 403(b) plans, the money is allowed to grow tax-free until it’s withdrawn during retirement.

Just like 403(b) plans, there are annual contribution limits set by the IRS for 401(k) plans. And for 2024, the limit is $23,000, while those 50 and older are able to make $7,500 in catch-up contributions.

One of the most notable benefits or distinctions associated with 401(k) plans is that they typically give employees a wide range of investment options including stocks, bonds, and mutual funds. Equally importantly, when offering a 401(k) retirement plan, employers, including nonprofits, can make contributions to employee accounts, thus helping employees to be more adequately prepared for retirement.

While the investment diversity is indeed a benefit, as is the ability to make matching contributions, traditional 401(k) plans also come with more significant reporting and administrative requirements. Specifically, traditional 401(k) plans must adhere to non-discrimination rules established by the government. To ensure that plans meet this requirement, employers must conduct annual tests known as the Actual Deferral Percentage and Actual Contribution Percentage tests. As the IRS explains, these tests are designed to verify that deferred wages and matching contributions from employers do not favor employees who are more highly compensated.

Penelope 401(k) Plans for Nonprofits

Penelope offers two retirement plans the Starter 401(k) Plan and the Safe Harbor 401(k) Plan.

For nonprofit organizations seeking an affordable yet beneficial retirement plan for their team, the Starter 401(k) costs just $49 per month, and an additional $3 per month per active employee. This plan is designed to be budget-friendly while still providing an essential benefit to your employees. The Starter 401(k) plan with Penelope is easy to manage and eliminates common barriers that nonprofits often face when adopting retirement plans.

While this plan does not include employer-matching contributions, it offers a robust alternative to state-sponsored plans, giving your employees an accessible way to save for their future. The 2024 contribution limit for the Starter 401(k) plan is $6,000. This plan is an excellent tool for nonprofits wanting to offer strong benefits without overstretching their budget.

The Safe Harbor 401(k) plan, on the other hand, allows nonprofits to help their employees save more through a contribution match. With Penelope, this plan starts at $125 per month, with an additional $8 per month per active employee. Compared to the Starter 401(k) plan, the Safe Harbor 401(k) plan has a higher contribution limit of $23,000 in 2024.

Savings Incentive Match Plan for Employees (SIMPLE)

For nonprofit organizations that are smaller or that may be searching for a plan with minimal operating costs or reporting requirements, the Savings Incentive Match Plan for Employees (SIMPLE) IRA may be worth considering.

SIMPLE IRAs are designed to allow both employees and the employer to contribute to a traditional IRA, according to the IRS. Available to any type of business (including nonprofits) with 100 or fewer employees, these straightforward retirement savings accounts can be a good choice for small employers or those that do not currently offer any retirement plan.

One of the most noteworthy benefits of a SIMPLE IRA is that the setup process is very straightforward. They can be established by adopting Form 5304-SIMPLE (which is available on the IRS website) and Form 5305 SIMPLE (also on the IRS website.) Employers can also opt to develop their own individually designed plan documents rather than using the IRS documents.

Another benefit of this type of account is the lack of filing or reporting requirements for the employer, which is in contrast to 401(k) plans, which must adhere to those already mentioned non-discrimination reporting requirements.

And in contrast to 403(b) plans, employers can make contributions to employees' SIMPLE accounts. In fact, the IRS requires that employers make contributions each year. The IRS requirements stipulate that employers make:

• Matching contributions of up to 3% of compensation (which is not limited by the annual compensation limit) or
• 2% nonelective contribution for each eligible employee

As part of the nonelective contribution requirements, even when eligible employees do not contribute to their SIMPLE IRA, the employer must still make contributions to each individual’s account totaling 2% of the employee’s compensation up to an annual limit, which for 2023 is $330,000.

For employees, SIMPLE IRAs also include the benefit of immediately being 100% vested, meaning the employee has total ownership of the money in the account.

Payroll Deduction IRAs

One more type of retirement savings plan to consider, Payroll Deduction IRAs are, in some ways, the simplest and easiest option on this list. These offer minimal administrative work or effort on the part of the employer, making them a potential option for nonprofit organizations that want to help employees save for retirement but do not have the bandwidth to manage the responsibilities associated with other more comprehensive employee benefit plans.

As the IRS explains: “Under a Payroll Deduction IRA, employees establish a Traditional or Roth IRA with a financial institution and then authorize a payroll deduction amount for it. A business of any size, even self-employed, can establish a Payroll Deduction IRA program.”

Establishing Payroll Deduction IRAs simply requires setting up the payroll deduction process for your employees in order to direct funds from their pay to their IRA account each pay period.

Employees choose how much they want deducted from their paychecks and depending on the IRA provider, there may be a wide array of investment options available for the money being contributed to the account. Additionally, earnings on the contributions to these IRAs are tax-deferred. 

With minimal employer involvement in these types of retirement accounts, there are very low administrative costs. There are also no annual filing requirements associated with Payroll Deduction IRAs for the employer. As the IRS explains on this front the “program will not be considered an employer retirement plan subject to Federal reporting and fiduciary responsibility requirements as long as the employer keeps its involvement to a minimum.”

And equally beneficial for small nonprofits, there is no minimum number of employees required.

However, there are indeed drawbacks in exchange for all of this simplicity. Most importantly, these plans do not allow employers to make matching contributions to employee accounts. This can be a significant issue, as it can be harder for employers to attract and retain employees who are seeking more substantial retirement programs.

Find the Retirement Plan Your Nonprofit

There’s a variety of retirement plan options available to nonprofit organizations, some of which are available even if you already offer a 403(b) plan. If you’d like to give your employees more investment options or implement a plan that allows for making employer contributions, a 401(k) or SIMPLE IRA may be worth considering. 

For smaller nonprofit organizations or those that do not have the administrative capability to support more extensive plans, Payroll Deduction IRAs may be a first step that can help employees prepare for retirement.

No matter what your size, Penelope can create a 401(k) plan tailored to your needs and budget. If you have questions about this option or any of the others on this list, call Penelope for a consultation.

Interested in retirement plans for your employees? Let Penelope support your nonprofit with their retirement needs.

Editor's Note: This blog was originally published on May 2023, and has been updated for accuracy and comprehensiveness.