Choosing the Best Retirement Plan for Your Nonprofit
If your nonprofit is exempt under Internal Revenue Code 501(c)(3),
you have a variety of employee retirement plans available. But to figure
out which plan is best for your nonprofit, you'll need to consider a
plethora of issues - including how much you're willing to pay into a
plan and the tax breaks associated with it. Here's a comparison of the
various plans and each one's benefits and drawbacks.
FUNDING OPTIONS
Let's face it, for any organization, money will always be a key factor
in choosing a retirement plan. And different plans are funded different
ways. Salary reduction plans, for example, are funded only with employee
dollars. They're flexible and have simple nondiscrimination requirements,
mandating that you offer plan participation to employees uniformly.
And if some employees choose to participate in the plan and others don't,
the plan can still qualify. Contributions to these plans are subject
to Social Security taxes, and employers aren't required to file an annual
Form 5500 the federal form required for all qualified retirement plans.
One good thing about salary reduction plans is that they're easy to
administer. And, generally, contributions go into individual accounts
for employees, which simplifies accounting. Contribution limits in 2002
are $11,000 ($12,000 for those over age 50), and this amount can be
increased if contributions haven't been coaxed out in previous years.
On the other hand, 403(h) plans can he funded with employer contributions,
employee contributions or both. Some 403(b) plans are written with provisions
that allow employers to make contributions. This is extremely complex
and takes into account employee ages period of time worked after which
employees must be included in the retirement plan, and the point at
which benefits must be fully vested - not to mention other ERISA nondiscrimination
rules. Employer contributions are exempt from Social Security taxes,
though you are required to file Form 5500.
The more popular 401(k) plans are similar in many respects to 403(h)
plans. And, because they're available to 501(c)(3) organizations, they
may be an excellent option. Like 403(b) plans, 401(k) contributions
can come from both the employer and employees. Also like 403(b) plans,
employee contributions are subject to Social Security taxes while employer
contributions are exempt from them. You are required to file Form 5500.
Employee 401(k) contribution limits in 2002 are $11,000 ($12,000 for
those over age 50), while employer contributions can total $40,000.
Administering these plans is a little
more complicated, because, in addition to all of the other nondiscrimination-rule
compliance, highly compensated employees' contributions have a relationship
to contributions by employees who aren't highly compensated. An example
of this is if a senior manager contributed a percentage based on the
percentage of rank and file employees.
The new safe harbor 401(k) is a variation of the traditional 401(k).
It requires employers to contribute a minimum of 3% of compensation
for each eligible employee and that those contributions be fully vested.
In turn, there's no requirement that contributions by highly compensated
individuals be tied to other employees.
THE SIMPLEST ROUTES?
Savings Incentive Match Plans for Employees (SIMPLEs) are, true to
their name, simple and inexpensive to administer. But they allow much
less flexibility about when employees can be admitted to the plan. Contributions
are actually made to individual IRA accounts on behalf of employees.
An employee who has received $5,000 in compensation in any two preceding
years must be included in the plan for the current year. Also, employees
are immediately vested in all contributions. Only employers with 100
or fewer employees may adopt SIMPLEs, which have an employee contribution
limit of S7,000 per year ($7,500 for those over age 50). Employer contributions
generally match employee contributions dollar for dollar, or employers
may elect to make a 2% contribution that isn't based on employee contributions.
SIMPLEs don't require an annual Form 5500 filing.
Similarly, SIMPLE 401 (k)s have the same requirements about eligibility
and vesting, except that the employer may impose minimum age requirements
or other conditions for participation. SIMPLE 401 (k)s allow employee
contributions of up to $7,000 per year ($7,500 for those over age 50),
and employers must match contributions dollar for dollar up to 3%, or
make a nonelective contribution of 2%. Unlike SIMPLEs, filing Form 5500
is required.
WELL-DEFINED PLANS
Defined contribution pension plans and defined benefit pension plans
are both qualified plans with nondiscrimination requirements, a Form
5500 filing requirement and annual contribution requirements. The biggest
difference, as the name implies, is that defined contribution plans
specify the amount that will be contributed and defined benefit plans
specify how much will be received by the beneficiary each year after
retirement. The defined contribution plan may require a 4% contribution,
and there's virtually no flexibility on this amount. Also, what the
employee gets is based on what the employer contributes to the plan
during the employee's tenure. Administering this plan is expensive,
moderately complex and requires an annual Form 5500 filing.
Defined benefit retirement plans are the most complex and expensive
to administer. They pay benefits to employees based on their years of
service and salary levels. Therefore, complicated actuarial assumptions
about employee turnover, retirement age, investment results and life
expectancy go into the annual contribution calculation. The advantage
of this type of plan is employees are assured that, if they remain with
your organization for a certain period of time, they will receive a
specific retirement benefit. This can he an effective way of retaining
employees. Form 5500 is required, and you must include a summary of
actuarial calculations in your nonprofit's annual financial statements.
OPTIONS ABOUND
Needless to say, your employee retirement plan options are many and
varied. Choosing one especially suited to your needs can be a daunting
task. Please call us; we can help you figure it out.
Highly Compensated Employees Benefit
From Section 457 Plans
Unlike many retirement plans, Section 457 plans are nonqualified
retirement plans. That is, commercial businesses can't deduct
them until they're paid to employees. But because that isn't an
issue for tax-exempt organizations, these plans can be a good
option for some highly compensated nonprofit employees. Section
457 plans are individually designed and generally cover only a
limited number of employees (usually senior management), and contributions
may be made regardless of contributions to other retirement plans.
Unfortunately, assets held in these plans are subject to the
claims of an organization's general creditors, This can be a big
disadvantage, so many variations of this plan (which are beyond
the scope of this article) have been developed to deal with this
concern. If you're considering implementing a Section 457 plan,
call us today. We can help you set one up and advise you about
how to administer it. |
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