How to set up a 403(b) for your nonprofit

Data shows there's a need to ramp up the retirement savings of those employed in the nonprofit sector. In 2019, there were only about one hundred 403(b) plans with approximately 360,000 participants in those plans. Given that there are about 12.2 million Americans employed 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 members adequately prepare for retirement is an uphill struggle shared by many nonprofits, as the staff consistently focuses 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 set up a 403(b) plan.

Unsure 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 nonprofit or 501(c)(3) organizations

A 403(b) plan operates very similarly to a 401(k) retirement savings plan. Both types of plans allow participants to contribute up to $23,000 in 2024 (with an extra $7,500 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:

• 401(k) plans are generally available to employees of for-profit companies

• 403(b) plans are generally offered by public education institutions and certain tax-exempt organizations

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 SECURE Act proposals, which aim 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:

• Section 403(b) pre-approved plan template

• Section 403(b) Prototype Plan Provisions

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:

• Application for Approval of Section 403(b) Pre-Approved Plan (fillable PDF)

• Form 2848, Power of Attorney and Declaration of Representative

• Form 8821, Tax Information Authorization

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:

• Form 14568, Model VCP Submission Compliance Statement. This form is a model compliance statement. Use attachments to explain the failure, how you’ll correct it, and what steps you’ll take to make certain the error will not occur again.

• Form 14568-B, Schedule 2, Nonamender Failures (other than those to which Schedule 1 applies) and Failure to Adopt a 403(b) Plan Timely. Submit only this schedule because it applies to the failure to amend by the required deadline.

• A copy of the signed and dated written 403(b) plan your organization adopted to comply with the final 403(b) income tax regulations.

• Required statements for submissions involving 403(b) plans that are signed and dated.

• If applicable Form 2848, Power of Attorney and Declaration of Representative (Instructions) or Form 8821, Tax Information Authorization. See additional details below

• All completed documents will have to be converted to PDF documents.

• NOTE: Combine all documents in this list into a single PDF file. If combined file exceeds 15MB, remove some documents so that it does not exceed this limit. The documents that could not be included in the combined PDF file can be faxed to the IRS at 855 203 6996.

• Form 8950, Application for Voluntary Correction Program, if required to make a fee payment

Four 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 help your lower your setup costs.

1. 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.

2. Chase low fees

Some 403(b) providers may charge hidden fees (such as 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:

• Employers pay a monthly base price starting $120 per month, plus $5 per employee per month.

• Employees pay a combined investment expense of just 0.066%¹ of their account balance monthly (compared to a monthly average of 0.133%² for small 401(k) plans).

3. Claim business deductions

It’s important to remember that 401(k) employer contributions are tax-deductible.

4. 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 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.

Want to set up a 403(b) plan for your nonprofit 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, 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, we’d be happy to help.