Harvard, MIT, and a statewide health plan (the model for the Affordable Care Act, or ACA) are just a few of the world-famous non-profits for which Massachusetts is known. In the Commonwealth, nonprofits generate about $119 million in revenues and hold nearly $335 billion in assets; and they employ nearly 18 percent of the workforce (more than half a million people). In short, they are big business and have a huge, immediate economic impact on the state and its neighbors.
But how well do these altruistic organizations benefit their employees?
There are over 33,000 nonprofits in Massachusetts. Scale may allow larger, more established nonprofits a better chance of providing retirement plans for their workers, but smaller nonprofits with fewer than 20 employees – about 22,000 people, or four percent of the nonprofit workforce – might find it harder to offer a 401(k).
In 2017, Massachusetts launched the Massachusetts Defined Contribution CORE Plan, a statewide 401(k) multiple employer plan (or MEP), available to Massachusetts nonprofit organizations with 20 or fewer employees. Backed by the state, the plan provides an affordable savings option for employers at small nonprofits to offer their workers.
CORE plan: The basics
The Massachusetts Defined Contribution CORE Plan functions as a 401(k) retirement plan. This means that any amount that employees deposit into the plan is tax-free until retirement. Upon retirement, employees can withdraw funds tax-free provided they were contributed more than five years prior and they’re at least 59 1/2 years old.
While there are many financial companies out there serving as 401(k) administrators, the Commonwealth is undertaking the administration and fiduciary burden of the plan. For the employer, it’s less expensive than engaging a private company.
By wooing multiple, small, nonprofit employers to join, the plan should ultimately scale as economically as a larger fund. For this reason, the CORE Plan had the support of the Massachusetts Nonprofit Network (MNN). MNN’s CEO, James Klocke, noted, “For many nonprofits, it’s a challenge to offer competitive employee benefits. The CORE Plan provides small nonprofits with an affordable way to invest in their employees.” And it worked: As of May 2019, the Massachusetts Treasury Office announced that 51 small nonprofits were signed with the CORE Plan.
There’s also an employer option for a “Safe Harbor” matching contribution, which helps encourage employees with lower compensation to take advantage of the plan. With the current cap on employee contributions of 90% of their gross income (for federal income tax purposes) or $19,000, a Safe Harbor matching contribution works as follows:
Illustration of CORE plan contributions
|If employee contributes...|
(percent of compensation)
|Then the employer must contribute |
(percent of compensation)
A Safe Harbor matching contribution also has the benefit of being immediately vested.
Opting in and opting out
The CORE Plan is not mandatory. For employees to receive the benefits of the CORE Plan, their employer must first sign on. This leaves workers whose employer does not see the benefits of the Plan, or whose margins are too narrow to afford it – or for any other reason – without a retirement plan.
If the employer does sign on, all employees are immediately included with 6% of their pay automatically deferred on a pretax basis into the CORE Plan in 60 days. Employees who wish to contribute more – or less – need to inform their plan representative. Employees who do not wish to be part of the plan will have to take the extra step of opting out.
Meanwhile, the Federal government is now looking at encouraging small businesses to offer retirement plans. The SECURE Act, which passed in the House 417-3, would allow small employers to participate in MEPs.
As with the ACA, it looks likes Massachusetts is ahead of the curve.