I am not totally up to speed on 403b plans, but am being forced to learn quickly..

[Guest Why]

We have a prospect that is currently employed by the United Way (non-profit). a small group of employees (4) are spinning out to a new non-profit (they have a 403b plan).

The UW employees are in a DB plan and it is being terminated.

I have several questions:

Can a non-profit have a 403b and a 401K?

How about a 403b and a simple?

What options are available for a group of 4 wishing to save for retirement, cash flow is not big, but they do want to save.

HELP!!!

[Lori Friedman]

Can a non-profit have a 403b and a 401K?

Yes, a Sec. 501©(3) organization can offer both a 403(b) plan and 401(k) plan simultaneously. There's very little to recommend this arrangement, though, which offers minimal advantages in return for numerous administrative headaches and troubles. The Sec. 402(g) salary reduction limit ($13,000 for 2004) must be coordinated with salary reductions under 401(k). An employee can't reduce his salary by more than 1X the annual 402(g) limit, regardless of the number plans in which he participates.

How about a 403b and a simple?

No. An employer can't make contributions to a SIMPLE plan if its employees receive an allocation of contributions (or an increase in accrued benefit) under any other "qualified retirement plan". For this purpose, a "qualified plan" includes a 403(b) arrangement.

What options are available for a group of 4 wishing to save for retirement, cash flow is not big, but they do want to save.

It sounds as if your start-up organization would like to provide a vehicle for its employees to defer portions of their salaries, but without being on the hook for an employer contribution and significant administrative costs.

The simplest and least costly approach is to offer a non-ERISA 403(b) plan. Employees can make voluntary deferral elections, the employer makes zero-zip-nada contributions, and there's nothing to administer -- the organization simply acts as a conduit to withhold the salary reductions and remit them to annuity providers and/or custodial accounts.

I know that our 403(b) detractors will take issue with this opinion, but a non-ERISA 403(b) arrangement remains the simplest way for a struggling employer to offer some sort of retirement benefit without incurring prohibitive expenses or plan contributions.

[joel]

Lori:

Your opinion is on target so long as the er includes no-loads on the investment platform. Adopt a 457(b) as well as the 403(b) and then the ee can max out on both.

Peace,

Joel L. Frank

[Lori Friedman]

Joel,

I agree with your suggestion about pairing 403(b) and 457(b). But, I wouldn't give that advice without the following cautions:

1. 457(b) participation must be limited to "top hat" employees. If the plan covers rank-and-file workers, it'll be subject to ERISA's provisions.

2. It can't be emphasized enough that the 457(b) plan assets will remain the general assets of the organization and fully subject to creditors' claims. The plan assets can't be segregated into a trust (NOTE: a "Rabbi Trust" really isn't a trust). That may be ok for now, while the current executives are running the organization, but what about the future?

(These two items apply ONLY to the 457(b) plans of exempt organizations. Government employers have very different rules.)