403(b) vs 401(k)

[kocak]

I don't know much about 403(B) plans. Why would a 501©3 organization want a 401(k) vs. a 403(B)? Advantages and/or disadvantages?

Thanks for all responses.

mck

[Guest derek]

There are a number of reasons why 501©(3) entities might want to have a 403(B) plan versus a 401(k):

1. No ADP test for 403(B) plans on salary deferrals (note that ACP does apply however).

2. Contribution limits are higher for 403(B) plans under Section 402(g)(8) (for employees with > 15 years of service).

3. No Form 5500 (generally) if the arrangement only allows for salary deferrals and the employer has very limited involvement. This also includes no audit requirement as well in most cases.

It is important to note that there are other pros and cons of each type of plan. For many non-profits, a 401(k) may make sense.

[kocak]

Thank you so much for your response. I guess my question is what are the pros of a 401(k) for a non profit?

It seems like a 403(B) is the way to go but I want to make sure I am not missing something. Thanks for your help.

mck

[Guest CVCalhoun]

The major pros of a 401(k) for a nonprofit are as follows:

1. An organization which is nonprofit, but is tax-exempt under some Code section other than section 501©(3) and is not a public school, cannot have a 403(B) plan. This is a major area of IRS audits, as apparently some 501©(6), etc., organizations have adopted what are purported to be 403(B) plans.
2. If a nonprofit is part of a group of entities, some of which are profit-making enterprises or organizations which are tax-exempt under a provision other than section 501©(3) and some of which are tax-exempt under section 501©(3), a 401(k) plan can apply to all members of the group, unlike a 403(B) which can apply only to the 501©(3)s.

   This is a particular advantage inasmuch as a 403(B) must allow participation by all employees of the 501©(3) (with very limited exceptions), but must not allow participation by the other types of organizations. This means that if you have doubts as to which entity is the employer of any particular employee, you could be in trouble regardless of which position you take. If you take a university as an example, the university may be tax-exempt under section 501©(3), but it may operate an HMO which is tax-exempt under section 501©(4), and have various research subsidiaries which are taxable entities. A professor in the medical school may also be a physician in the HMO, and participate in research under the auspices of one of the research subsidiaries. It is a whole lot simpler to figure out such an individual's coverage if all of the entities are covered under a single 401(k) plan than if some are covered under a 401(k) and some are covered under a 403(B).

3. At present, money cannot be rolled from a 403(B) to a 401(a) plan, or vice versa. (You can click here to see a description of legislation which would change this result, but that legislation has not passed so far.) If the nonprofit organization operates in an area in which much of its workforce may have worked for taxable organizations in the past, or may do so in the future, it may want to provide a 401(k) plan so that incoming and outgoing employees can roll over money from or to a 401(a) plan.

Hope this helps!

[kocak]

Thanks for all responses. They were a big help.

mck

[Christine Roberts]

I am trying to locate recent articles discussing this topic - any referrals would be appreciated.

[Guest PJ]

I haven't been able to find a lot of information regarding plan design strategies for nonprofit healthcare organizations that sponsor a 403(B) plan and have for-profit affiliates participating in a 401(k) plan.

I don't think this type of organizational structure is uncommon in the healthcare industry, but I've been able to find very little information regarding what plan design strategies these types of organizations have developed to address coverage and discrimination test issues.

It is my understanding that since nonprofits can offer 401(k) plans, many of these "controlled groups" are no longer able to exclude 403(B) plan participants from 401(k) coverage and discrimination tests.

What viable alternatives are available to organizations in this situation?

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PJ

[Guest Stuart Harris]

Tres. Reg. section 1.410(B)-6(g) allowed an employer, when running the minimum coverage test, to exclude employees who were ineligible to participate in a 401(k). This meant that historically a control group that included both tax-exempt and for-profit employers could utilize a 403(B) for the tax-exempt employees and a 401(k) for the for-profit employees, and the 401(k) plan could still pass 410(B) by virtue of the special rule. However, since tax-exempt employees can now participate in a 401(k), the rule is no longer applicable. In Notice 96-64 the IRS said the rule would continue during a transitional period, up through 1997. I haven't seen anything since then, and I haven't been able to get a response from National Office. However, it seems overbearing to essentially tell all these employers to either include the whole work force in the 401(k), and get by the 410(B) test but face likely ADP testing problems, or do away with the 401(k) option for the for-profit employees. Anyone see any alternatives?