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A Guide to Retirement-Plan Options for Nonprofit Employers

Several retirement-plan choices await charities that seek to increase the benefits they offer their employees -- 

ALSO SEE: How Small Charities Provide Retirement Benefits to Their Workers

although in recent years, federal legislation has reduced the number of distinctions between the plans. The following is a guide to the current options:

403(b) plans without employer contributions

Description: Named after a section of the tax code that describes these plans, such arrangements allow workers to save before-tax earnings through payroll deductions. The plans are available exclusively to employees of charities and public schools and universities. Participants do not pay taxes on the money in their plans until they withdraw it.

What sets them apart: Unlike 401(k) plans -- another type of defined-contribution plan that can receive deposits from an employee, or both the employee and employer -- 403(b) plans are required by law to offer participants the opportunity to receive their money in an annuity or contract that provides income at regular intervals and predetermined amounts upon retirement. These plans are popular with small nonprofit groups because they do not require employer contributions and are relatively simple to administer.

Contributions: The maximum amount that most employees can contribute to their plans for 2003 is either $12,000 or 100 percent of the employee's annual compensation, whichever is less. That amount will increase by $1,000 a year until 2006, after which further increases will be indexed to inflation, according to the Internal Revenue Service, which regulates the plans.

403(b) plans with employer contributions

Description: These plans are financed by employee and employer contributions with before-tax earnings. Workers do not pay taxes on their money until it is withdrawn. The plans are only available to charities, including public schools and colleges.

What sets them apart: Employers that set up 403(b) plans with employer contributions must comply with more regulatory requirements than those organizations that do not contribute to such plans. However, the Economic Growth and Tax Relief Reconciliation Act of 2001 made both types of 403(b) plans more attractive by increasing their portability, according to David L. Wray, author of Take Control With Your 401(k) (Dearborn Trade Publishing, 2002, $18.95). Previously, when employees left a job, they were required to roll over a 403(b) into another 403(b) or a traditional individual retirement account. Now, a 403(b) plan can also be rolled over into a 401(k) plan.

Contributions: The maximum amount that most employees can contribute to their plans in 2003 is $12,000 or 100 percent of the employee's annual compensation, whichever is less. That amount will increase by $1,000 a year until 2006, after which further increases will be indexed to inflation, according to Mr. Wray. The amount that highly compensated employees can contribute may be subject to additional limits. Employers may match the amount of the employee contribution, base their contribution on a fixed percentage of employee compensation, or combine elements of both.

401(k) plans

Description: These plans are available to all employers except federal, state, and local governments. A 401(k) can receive contributions from either just the employee or both the employee and employer. Employees do not pay taxes on the money in their plans until they withdraw it.

What sets them apart: The popularity of 401(k) plans make them a better understood and recognized commodity, though employers offering these plans also face more regulatory requirements, says Carol Calhoun, a Washington lawyer who founded the Employee Benefits Legal Resource Site. In addition, organizations with both nonprofit and for-profit subsidiaries can cover all employees with a 401(k) plan.

Contributions: The maximum amount that most employees can contribute to their plans in 2003 is either $12,000 or 100 percent of the employee's annual compensation, whichever is less. That amount will increase by $1,000 a year until 2006, after which further increases will be indexed to inflation, according to the Internal Revenue Service. The amount that highly compensated employees can contribute may be subject to additional limits. Employers may match the amount of the employee contribution, base their contribution on a fixed percentage of employee compensation, or combine elements of both.

Simplified employee pensions

Description: To avoid the cost of setting up a separate retirement plan, an employer can instead make contributions to the individual retirement accounts of its employees, according to the U.S. Department of Labor's Employee Benefits Security Administration. Simplified employee pensions are available to employers with 100 or fewer employees who do not provide another retirement plan and who do not hire employees under lease agreements. The money is taxed only when employees withdraw it.

Contributions: Employers may contribute to each employee's account a percentage of compensation not to exceed 25 percent of compensation or $40,000 a year, whichever is less. An employee may contribute up to $3,000 or 100 percent of compensation annually, whichever is less. -- Maura Webber