Pension puzzle: Part 2

Nonprofits weigh retirement-plan options.

[Editor’s note: This is the second article in a series on retirement plans for nonprofits.]

By Todd Cohen

[04.01.04] — Selecting a retirement plan and vendor can be tough.

Nonprofit employers must choose between a 403(b) and 401(k) and possibly others; pick a fund manager; set investment policies; decide whether to administer the plan or hire an administrator, and whether and how to contribute on behalf of employees; and determine how employees vest in the plan and whether they can borrow from it.

Dallas Salisbury, CEO of the Employment Benefit Research Institute, a nonprofit in Washington, D.C., says he sees few differences between 401(k) and 403(b) plans.

“Both of them basically would allow an entity to design an almost identical program,” he says.

The rules and amounts that employees can contribute are “exactly the same” for 403(b) and 401(k) plans, says Peter Alwardt, partner in charge of retirement planning at Eisner LLP, a consulting firm in New York City.

This year, an employee under age 50 can contribute up to $13,000, before taxes, to either type of plan through salary deferrals, up from $12,000 in 2003.

That amount, which is limited to employees’ total compensation, will grow to $14,000 in 2005 and $15,000 in 2006, and then will be adjusted for inflation.

The limits that employees and employers combined can contribute also are the same for both types of plans, Alwardt says.

This year, the combined total is $41,000.

To help employees over age 50 who may not have saved for their retirement when younger, or who may have financial needs such as paying for their children’s education, the law allows employees under both types of plans to contribute an additional $3,000 this year, an exception that will grow to $4,000 in 2005 and $5,000 in 2006.

Non-Discrimination Test

Nonprofit employers also need meet a “non-discrimination” test that ties the amount of contributions by higher-paid employees to the amount contributed by lower-paid employees.

Because higher-paid employees may want to defer as much as they can, and because those who are paid less may not defer a big percentage of their pay, the test can be tough to meet, and nonprofits may have to return to the highly compensated employees some of what they contributed, dollars that then are taxed, says Gary Mauger, Denver-based vice president of client services for TIAA-CREF.

If it fails the test, a nonprofit can comply with the law by making additional contributions on behalf of the lower-paid employees.

To avoid annual non-discrimination testing, nonprofit employers can make additional “safe harbor” contributions to the lower-paid employees for which the employees would be fully vested.

The rules tend to be more difficult to meet under 401K plans than 403b plans, Mauger says.

Nonprofits, such as hospitals, that operate for-profit subsidiaries, which cannot use 403(b) plans, might want to use a 401(k) so they can offer a unified plan to their nonprofit and for-profit employees, Alwardt says.

NEXT: Nonprofits try to keep retirement plans simple.

Other stories in series:

Part 1: Nonprofits face tough choices in selecting retirement plans.

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