403(b) vs 401(k): Comparing retirement plans for nonprofits

Employers considering offering a retirement plan for their employees have multiple choices. Specifically, tax-exempt nonprofit organizations can choose between offering a 403(b), a 401(k), or both.

So, what exactly are the main differences between a 403(b) and a 401k retirement savings plan? This article breaks down the differences, pros and cons, and gives employers some guidance to help make an informed decision. 

Please contact us if you have any questions about launching your own retirement accounts. We have experts available to help you every step of the way.

403(b) vs. 401(k) plans: Which organizations are eligible for 403(b) plans?

When comparing 403(b) and 401(k) retirement plans, it is essential to understand their key differences. 

What is a 403(b)?

A 403(b) plan, also known as a tax-sheltered annuity (TSA), is available exclusively to public schools and select tax-exempt organizations.  

Eligible organizations for a 403(b) include:

• 501(c)(3) entities under the Internal Revenue Code

• Public school systems

• Cooperative hospital service organizations

• Uniformed Services University of the Health Sciences (USUHS)

• Public school systems governed by Native American tribal governments

• Certain ministries 

• Non-profit institutions such as universities, religious organizations, or social service agencies

These organizations may serve various purposes, such as religion, education, charity, science, literacy, or preventing cruelty to children or animals. Typically, they are structured as corporations, community chests, funds, or foundations. Note that individuals, partnerships, and for-profit corporations generally do not qualify for 403(b) plans.

What is a 401(k)?

A 401(k) plan is a tax-deferred investment account that allows employees to contribute a part of their salary.

In general, almost any type of company may offer a 401(k) plan, making it more widely available throughout the United States. Though 401(k)s are primarily offered by larger for-profit companies, many nonprofit entities also offer 401(k) plans to their employees. In fact, many nonprofit organizations may choose to offer both a 401(k) and a 403(b).

Now that the eligibility requirements and the types of employers that qualify for 403(b) and 401(k) retirement savings accounts are clear, you'll have to decide which option is the best for you and your employees. Before deciding, it's important to consider additional information to help you navigate the selection process. While there are similarities between the plans, they are not identical.

401(k) and 403(b): What are their similarities?

Here's what they have in common:

• In 2025, the maximum annual contribution limit is $23,500.

• The additional catch-up contribution for employees over age 50 is $7,500, and for employees aged 60-63, the catch-up limit is $11,250. This means employees aged 50-59 can contribute up to $31,000, while those aged 60-63 can contribute up to $34,750.

• All company employees may be eligible to participate.

• The total employee elective deferral plus employer contribution limit is limited to the lesser of $77,500 for those over 50, $81,250 for those aged 60-63, or 100% of the employee's contributions, with a base limit of $70,000. 

• Both 401(k) and 403(b) plans may be terminated according to pre-determined plan-governing rules.

• Both types of retirement plans allow for Roth deferral option where employees contribute after-tax money.

More information on the Roth vs. traditional distinction:

• Roth 401(k) vs. Traditional 401(k)

• Roth 403(b) vs. Traditional 403(b)

401(k) vs 403(b): Breakdown of differences and their tax advantages

How does the employer match work in 403(b) and 401(k) plans?

In both 403(b) and 401(k) plans, the employer match is a valuable benefit for workers. Matching contributions incentivize workers to save for retirement and reduce their taxable income. The employer or business owner agrees to contribute money to the employees' employer-sponsored retirement plan based on the employees' contribution and salary. That contribution could be a full match, where 100% of the employees' contributions are matched dollar-for-dollar, or a partial match, such as 50%, where the employer will contribute 50 cents for every dollar the employees contribute. 

Employers also choose how much of an employee's contribution to match for both plans based on the percentage of the employee's salary contributed. For example, an employer may match dollar-for-dollar until the employee contributes 3% of their salary and will not match any contributions an employee makes over 5%.

Employer matches for 401(k)s and 403(b)s often include "vesting" clauses, which require employees to stay in their jobs for a certain number of years to keep the full match. Employees might be entitled to 100% of an employer match after three years, for example, but none if they leave before then. 

Employers may want to work with a certified financial planner to determine the appropriate match for each plan.

Nonprofit retirement plan cost considerations

The 403(b) was introduced in 1958 as a tax-sheltered annuity arrangement, and participants could only invest in annuity products. Generally, annuity contracts charge maintenance and operational fees that can cost more than comparable mutual fund expenses. Over the ensuing decades, 403(b)s became synonymous with annuity fees. However, the 403(b) is evolving, and distancing itself from annuities. 

How to decide: 401(k) vs. 403(b)

If you’re deciding between a 401(k) or 403(b) plan, there are a few factors to think through. Generally, a 403(b) has less investment options compared to a 401(k). Additionally, the main benefit of a 401(k) over a 403(b) is flexibility. Would your organization potentially change from a 501(c)(3) to a C-Corp or S-Corp? If so, a 401(k) would stay with you during that transition, whereas a 403(b) would not. However, a 403(b) has easier compliance testing requirements as they are exempt from several annual IRS nondiscrimination tests. Plus, there are special considerations for edge employees and government employees, including nurses, doctors, and librarians when choosing between a 401(k) and a 403(b) plan.

How to choose the right investments for your retirement plan

Whether you select a 401(k) or 403(b) plan, an employer plays a critical role in selecting investment options for their company’s retirement plan. Investment options can significantly affect employees’ retirement savings. When selecting investments, you should not only consider the fund fees but also the financial needs of your employees. Are your employees younger, or do they skew older? How financially literate are they? What are their income levels and financial goals? The answers to these questions can determine the type and cost of investment options for your employees.

Human Interest's retirement savings plan solutions

At Human Interest, we pride ourselves on offering a 403(b) plan that is on par with our 401(k) offerings, in the best interest of organizations and employees who do a lot of good for the world. We offer solutions that consider the retirement goals of our plan participants, and we ensure that our fees are transparent.

Related articles:

• How Much Does a 401(k) Cost Employers?

• How Much Does an Employee Cost?