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 2026, the maximum annual contribution limit is $24,500.
• The additional catch-up contribution for employees over age 50 is $8,000, and for employees aged 60-63, the catch-up limit is $11,250. This means employees aged 50-59 can contribute up to $32,500, while those aged 60-63 can contribute up to $35,750.
• All company employees may be eligible to participate.
• The total employee elective deferral plus employer contribution limit is limited to the lesser of $80,000 for those over 50, $83,500 for those aged 60-63, or 100% of the employee's contributions, with a base limit of $72,000. 
• 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.

Frequently asked questions about 401(k) vs 403(b)

What is the 15-year catch-up provision in a 403(b) plan?

Certain 403(b) plans offer a specialized "service-based" catch-up provision that is completely absent from 401(k) frameworks. Under this rule, participants who have completed at least 15 years of service with a qualified organization (such as a 501(c)(3) nonprofit, public school system, or hospital) may be permitted to contribute up to an additional $3,000 per year, up to a lifetime maximum of $15,000. This service-based contribution can potentially be utilized in tandem with the standard age 50+ catch-up limit ($8,000 in 2026), allowing long-tenured nonprofit employees to accelerate their retirement savings further than standard 401(k) guidelines allow.

How do ERISA requirements differ between 403(b) and 401(k) plans for nonprofits?

While nearly all 401(k) plans are strictly governed by the Employee Retirement Income Security Act (ERISA), 403(b) plans can sometimes be exempt. A nonprofit's 403(b) plan generally remains exempt from ERISA if the organization is a government entity or a church, or if it is a private nonprofit that exercises minimal involvement. Minimal involvement means the employer does not contribute to the plan, participation is entirely voluntary, and the organization's role is strictly limited to administrative duties like processing payroll deductions. Non-ERISA 403(b) plans are exempt from filing Form 5500 annually and avoid certain fiduciary liabilities, whereas 401(k) plans must consistently navigate these reporting and testing metrics.

Can a nonprofit organization operate both a 403(b) and a 401(k) concurrently?

Tax-exempt 501(c)(3) organizations and specific public entities possess the legal eligibility to offer both a 403(b) and a 401(k) plan to their workforce at the same time. Organizations might deploy this dual-plan strategy to accommodate different employee classes—such as offering a 403(b) to salaried educators or clinical staff, and a 401(k) to administrative or corporate staff. However, participants who have access to both plans cannot double their savings limits; the Internal Revenue Service (IRS) enforces a combined elective deferral limit ($24,500 in 2026) across all employer-sponsored accounts held by a single individual.

How do investment options typically compare between traditional 403(b) structures and 401(k) plans?

Historically, 403(b) plans were created specifically as tax-sheltered annuity contracts, meaning fund options were legally restricted solely to fixed or variable annuities. While modern regulations have evolved to allow 403(b) plans to include mutual funds, historical data indicates that over half of 403(b) sponsors (53.5%) still utilize annuities as a primary distribution mechanism. In contrast, 401(k) plans traditionally offer a broader, more diversified range of investment choices right out of the box, including mutual funds, exchange-traded funds (ETFs), individual stocks, and managed portfolios, generally carrying a different fee structure than legacy annuity-based systems.

What happens to a 403(b) retirement plan if a nonprofit transitions into a for-profit entity?

If an organization undergoes a structural transformation from a tax-exempt 501(c)(3) status into a for-profit entity (such as a C-Corp or S-Corp), it legally forfeits its eligibility to sponsor a 403(b) plan. In this corporate transition scenario, the 403(b) plan must be frozen or terminated, and participants must eventually roll their balances over into an IRA or a newly established corporate 401(k) plan. Conversely, a 401(k) plan offers greater organizational flexibility, as it is legally permitted to remain fully active and transition alongside the business without requiring a plan termination.