401k Plan vs. 403(b) for a non-profit organization

[Pammie57]

We have a client that is a non-profit organization with a 401(k) Plan.  I know they could have either type of plan- (403b or 401k)..They want a nutshell reason why a 401k is better than a 403b or/an explanation of the primary differences in the two.  Does anybody have a concise answer or opinion on this.   They don't have many participants yet.  Thanks!

[ratherbereading]

Basically they are the same- this may be helpful: 403b vs. 401k: What's the Difference? - Good Financial Cents®

[C. B. Zeller]

The big difference is the universal availability rule—403(b) plans have to cover everybody, immediately, with limited exceptions. A 401(k) plan on the other hand can have a service requirement. The flip side of that is a 401(k) plan is subject to the ADP test whereas a 403(b) is not.

[Mr Bagwell]

The 403b may be a huge difference maker if the plan is not a safe harbor design as the ADP will pass with universal availability.  Some non-profits don't have/don't want to spend the safe harbor dollars,  but the HCE wants to defer the max.  Under the 401k this would be a problem.  Under the 403b this is not a problem. 

[Mr Bagwell]

Just now, C. B. Zeller said:

The big difference is the universal availability rule—403(b) plans have to cover everybody, immediately, with limited exceptions. A 401(k) plan on the other hand can have a service requirement. The flip side of that is a 401(k) plan is subject to the ADP test whereas a 403(b) is not.

Exactly.   The 403b I have right now has a ton of low paid employees.  the 403b is the right choice.  the ACP isn't good, but the lone HCE can defer to max.

[Flyboyjohn]

If the employer is not intending to make any contributions then a non-ERISA 403b is the ticket (no ADP testing, no 5500, yada, yada).

If the employer intends to make contributions that would meet a 401k safe harbor then 401k is the ticket (larger universe of investment/record keeping platforms, avoid universal availability, plan investments not restricted to annuities or mutual funds)

[Belgarath]

Don't forget that top heavy does not apply to a 403(b). It can be an issue.

[Patricia Neal Jensen]

I agree with all comments.  I would not, however, jump to recommending a Non-ERISA 403(b). (Flyboyjohn)  They are much more challenging than many plan sponsors think.  

The law does not favor them and it is easy for the employer to make a mistake that makes the plan ERISA.  I attempted to attach a decent Word doc that reviews the rules which must be followed.  

I would suggest an ERISA 403(b).  Still no top heavy and no deferral testing and in the "modern world," there are plenty of quality investment options.  They would have to file a 5500, though, and if they would be a large plan filer, the audit can be expensive.

Good discussion!

PNJ

Non-ERISA 403(b) Requirements.docx

[Francis]

My view is an ERISA 403b is almost always better because it is not subject to the ADP test. There are fewer recordkeeping options available for 403b plans vs. 401k plans, but there are enough good ERISA 403b plan options for most non-profits to find one that's a good fit.

[jsample]

Although few employees take advantage, there is a 15 years of service special catch-up rule that is available in 403(b) that is not available in 401(k).