Selecting Between a 401(k) And 403(b) For a Nonprofit

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Copyright © 2007-2008 Daniel Lamaute


Newly released IRS regulations impose several new requirements and fiduciary responsibilities on employers with 403(b) plans. While the regulations generally don't take effect until January 1, 2009, there are some provisions that apply sooner. The new rules may substantially increase the paperwork, cost of administration, and potential liabilities of sponsoring a 403(b) plan, according to the retirement plan specialist at Lamaute Capital, Inc. Thus, now may be a good time for some nonprofits to look at updating their 403(b) plan or even consider switching altogether to a 401(k).

The 403(b) is a retirement plan for non-profits only. By contrast the 401(k) can be used by both non-profit and for-profits institutions. But, many non-profits only considered the 403(b) when they set-up their retirement plan because they thought that 1) they qualified only for a 403(b), 2) it would minimize their administrative requirements, 3) it was the only plan that let contributions come solely from the employees, and/or 4) they could maintain the 403(b) with little to no cost to the employer.

The new regulations may make the 403(b) more burdensome and expensive to maintain than a 401(k). Among the new 403(b) requirements are that the plan must be in writing and contains all the terms and conditions for eligibility, limitations, and benefits under the plan. The consequences of not meeting the new regulations can be severe since all 403(b) contracts purchased for an employee by an employer must be treated as a single contract. As a result, if a contract fails to satisfy certain Section 403(b) requirements, then generally not only that contract but also any other contract purchased for that individual by that employer would fail to be a contract that qualifies for tax-deferral.

It is possible for an employer to have a 401(k) that operates with employee contributions only, and has minimal administrative burdens at a low in cost. The 401(k) is a widely popular plan and typically comes bundled with:

Pre-approved prototype plans.

Good software and support materials.

Participant retirement investment education.


About the Author:
Lamaute Capital is offering a free assessment of how the new regulations may affect your 403(b) plan, and they will prepare a free 401(k) plan proposal for your comparison. The firm can be reached at 202-726-1662 or www.InvestSafe.com

By Daniel Lamaute of Lamaute Capital, Inc. http://www.InvestSafe.com