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How to Set up a 403(b) for Your Nonprofit

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Stats show there is a great need to ramp up the retirement savings of those employed in the nonprofit sector. According to Vanguard, in 2019 there are currently only about 100 403(b) plans with approximately 360,000 participants in those plans. Given that there are about 12.2 million Americans working in the nonprofit sector, this translates to a 23% adoption rate of 403(b) plans. On the other hand, Vanguard reported an 82% participation rate for other types of defined contribution plans, such as 401(k)s.

Helping their members to adequately prepare for retirement is an uphill struggle shared by many nonprofits as the staff consistently focus on its core mission: helping others. Given the difficulties, many small- and mid-size nonprofit organizations simply let their employees fend for themselves with individual retirement accounts at whatever brokerage firm they can find. But nonprofit workers, who are often underpaid, may put themselves at severe financial risk by not saving for retirement at all if they lack a workplace retirement plan. 

Providing a workplace retirement savings plan for these nonprofit workers should become a high priority and one of the best solutions is to setup a 403(b) plan. 

Not sure where to start? Read our guide on how to find the best 403(b) for your nonprofit.

How to Setup a 403(b) Plan for a Nonprofit or 501(c)(3) Organization

A 403(b) plan operates very similarly to a 401(k) retirement savings plan. Both types of plans allow participants to contribute up to $19,500 in 2020 (with an extra $6,000 in catchup contributions for those age 50 and up) and make pre-tax contributions. The key difference between a 401(k) and 403(b) is the type of business that offers them:

Another key difference is that a majority of 403(b) plans include some kind of annuity form of benefit issued by a state-regulated insurance company. However, this may change with the SECURE Act and its proposed laws to make it easier for 401(k) plan administrators to offer annuities.

Step 1: Review the details of the IRS’s 403(b) pre-approved plan program

Bookmark the 403(b) pre-approved plan program section of the IRS website because it provides a great overview of the 403(b) setup process, including sample language that meets pre-requirements from the IRS. 

Step 2: Establish a written program for your 403(b) plan

The majority of 403(b) plans must have a written program that contains mandatory provisions from the IRS, including eligibility of participants, amount of elective deferrals, and timing and form of plan distributions. You can also choose to add optional provisions, including clauses for deferral catch-up contributions, ways to make ROTH contributions, and details on plan loans.

Here are some IRS resources to establish your 403(b) written program:

Tip: If your organization falls under a larger organization or is familiar with the 403(b) plan of another comparable organization. You may opt to go with a pre-approved retirement plan. The IRS keeps a list of 403(b) plans that were submitted for review from June 2013 to November 2017.  You may use those written programs that reflect the 403(b) regulation’s requirements and tailor the language for use by your organization.

Step 3: Complete and file the necessary IRS forms

Key forms to file with the IRS are:

Step 4: Address plan errors

To expedite the setup process, avoid common 403(b) plan errors with the IRS 403(b) Fix-it Guide.

Depending on the type of error, you may be able to institute a self correction program without any IRS filing or penalty or may be subject to a voluntary correction program (VCP) with IRS formal filing and applicable penalty. A common error is to miss the December 31st deadline to adopt a written plan, here’s an overview on how to correct that plan error.

If required to file a VCP, you’ll need the following documents:

4 Strategies to Minimize 403(b) Setup Costs

After reviewing the list of steps above, you can quickly realize that setting up involves not only money but also adequate time to timely and properly process forms and avoid any potential penalties! Here are some ways to make sure that you lower your setup costs and cross your t’s and dot your i’s.

File Form 5500: Under the current legislation, eligible small businesses can claim 50% of necessary eligible startup costs for a workplace plan up to a maximum of $500 per year for three years. This adds up to a total of $1,500 in tax credits over the three-year period.

Chase low fees: Some 403(b) providers may charge many types of fees—fees you may not even realize you’re being charged (Front- or back-end loads! Commissions! Surrender charges! Asset-based administration “wrap” fees!). It doesn’t have to be that way. Take for example, Human Interest which provides transparent pricing:

Claim business deductions: It’s important to remember that 401(k) employer contributions are tax deductible.

Get peace of mind: Seek robust services and features that go beyond the basics to meet your needs. Take the time to talk to your provider on how they plan to comply with legal requirements, such as filing Form 5500,  and your personal ones, such as adding a Roth 403(b) option to allow your employees to make after-tax contributions.

The bottom line is that setting up a savvy business strategy. A retirement savings plan is among the most wanted employee perks and a powerful tool to attract (and retain!) talent.

Are you interested in setting up or need a second look at the 403(b) plan for your non-profit organization?

Human Interest has helped several eligible small businesses to set up, implement, and maintain a 403(b). We’ll take care of creating participant accounts, processing contributions every pay period and syncing them with your payroll provider, and ensuring that all compliance testing and paperwork is completely taken care of.

If you would like to learn more about the process of setting up or improving a 403(b) or any other plan that better suits your organization’s needs, please click here to contact us and we’d be happy to help!

 

 

The Human Interest Team The Human Interest Team

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

Small and medium businesses can be prepared, too.

Start a great retirement benefit for less than the cost of one employee’s health insurance.

Human Interest - The 401(k) provider for small and medium-sized businesses

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Get free 401(k) resources now. Learn more about 401(k)s for you and your company.