Pension benefit

Elective deferrals in 403(b) retirement plan not subject to discrimination testing.

To the editor:

[04.12.04] — I enjoyed Todd Cohen’s article on the choices nonprofits face in selecting a retirement plan [Pension puzzle: Part 1, Nonprofits face tough choices in selecting retirement plans, Philanthropy Journal, 03.25.04].

However, I did want to point out that there are a number of other advantages to the 403(b) plan compared to the 401(k) plan (in addition to the simplified 5500 reporting for 403(b) plans with no schedules or accounting reports required as mentioned in the article).

Keep in mind that another very key difference is that the elective deferrals made in a 403(b) plan are not subject to nondiscrimination testing, while the deferrals in a 401(k) plan generally are.

If there are highly compensated employees in the 501(c)3, or those who earned $90,000 or more in the previous year, the testing of 401(k) deferrals will often limit the amount of deferrals that can be made by the highly compensated employees. Not true in a 403(b) plan.

Other important differences for 501©3 employers to consider are:

Contrary to the comment of a consultant in your Part II article [Nonprofits weigh retirement plan options, 04.01.04] that the 403(b) and 401(k) limits are “exactly the same”, there is a special longevity increased limit for 403(b) plans for the employees of educational, hospital, home health services, health and welfare and religious organizations. In 2004, that total deferrals for 403(b) with all catch ups are $19,000, compared to only $16,000 in the 401(k).

A special Department of Labor exemption for 403(b) elective-deferral-only plans will generally mean that there is no coverage under Title I of ERISA: Eliminating the reporting and disclosure requirements that would apply to any 401(k) plan.

The vast majority of 501(c)(3) employers do, indeed, elect to use 403(b) for their retirement plan instead of a 401(k) plan — fully two-thirds according to a recent survey reported in The NonProfit Times.

The reason?  So many 501(c)3’s can’t afford heavy administrative costs, and they want all of the available retirement plan dollars to go to their employees, not to third-party administrators.

Ellie Lowder, TSA Training & Consulting Services, Tucson, Ariz.

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