Hey Joel! – Is my 501(c)(3) organization eligible for a 401(k) plan? Are there any benefits over a 403(b) plan? (2024)

FAQs

Hey Joel! – Is my 501(c)(3) organization eligible for a 401(k) plan? Are there any benefits over a 403(b) plan? ›

Contemplate no more! A 501(c)(3) organization is a nonprofit organization and can sponsor either a 401(k) plan or a 403(b) plan. In 1996, the law changed allowing nonprofit organizations to choose either the 401(k) or 403(b) plan for their employees.

Eligibility Distinctions: A 403(b) is exclusive to public schools and select tax-exempt organizations, including 501(c)(3) entities, while a 401(k) can be offered by nearly any type of company, including for-profits and nonprofits.

The following employees are eligible to participate in a 403(b) plan: Employees of tax-exempt organizations established under IRC Section 501(c)(3). Employees of public school systems who are involved in the day-to-day operations of a school. Employees of cooperative hospital service organizations.

If you have both a 401(k) plan and a 403(b), you may contribute to both. However, you may only contribute up to the individual contribution limit of $22,500 in 2023 and $23,000 in 2024 (plus any catch-up contributions you're eligible for).

A 401(c) and 501(c) both refer to IRS Classifications in the United States. The primary difference is that a 501(c) refers to a formal classification of NOT FOR PROFIT organizations while the 401(c) refers to a formal classification of “self-employed individuals and owner-employees”.

A 501(c)(3) organization is a nonprofit organization and can sponsor either a 401(k) plan or a 403(b) plan. In 1996, the law changed allowing nonprofit organizations to choose either the 401(k) or 403(b) plan for their employees.

Tax-exempt, nonprofit organizations can offer a 401(k), a 403(b), or both. Recent regulatory changes are making nonprofit 401(k)s even more popular among many tax exempt organizations. 401(k) plans are often significantly cheaper for both employers and employees.

Which employees can be excluded from the plan? A 403(b) plan may exclude certain employees from universal availability for elective deferrals: Employees who normally work less than 20 hours per week (this does not necessarily mean all part-time employees);

If you're not age 50 but have at least 15 years of service with UC, you may be able make pretax catch-up contributions under the 403(b) Plan's “lifetime” catch-up contributions feature. To qualify, your regular 403(b) Plan contributions over time can total no more than $5,000 multiplied by your years of UC service.

But beware: While a terrific savings vehicle, 403(b)s have some drawbacks. 403(b)s have a narrower range of investments than 401(k)s, and many plans over-emphasize, or even prioritize, annuities as the primary investment option.

Can you cash out your 403b? ›

You can withdraw from your current employer's 403(b) plan penalty-free as long as your plan allows in-service withdrawals and you're over age 59 1/2. Other exceptions include if you become disabled or face a qualifying financial hardship.

When you quit your job, your 403(b) plan remains intact. However, employer contributions cease, and you might lose some funds depending on the vesting schedule.

The features of a 403(b) plan are comparable to those found in a 401(k) plan. 5 The big difference is in the participants. They are employees of public schools, tax-exempt organizations, and certain ministers. Many plans vest funds over a shorter period than 401(k) plans or may allow immediate vesting of funds.

501(c)(3) organizations are nonprofit groups with a dedicated mission. Most people are familiar with them as churches and charities but they also include private foundations. They receive favorable tax treatment, such as avoiding federal income and unemployment taxes, as long as they operate to support their mission.

The overwhelming majority of 501(c)(3) organizations are nonprofit corporations. However, entities that can seek 501(c)(3) determination from the IRS include: Corporations. Trusts.

403(b) plans have fewer administrative costs and are cheaper for employers to offer because the government doesn't want to add additional financial burdens to nonprofit organizations. As a self-employed individual, you would not be able to invest in a 403(b) plan, but can open a solo 401(k).

The Disadvantages of a 403(b)

Since the plan functions as a retirement savings vehicle, you could face additional expenses if you take withdrawals early. "If you distribute funds from a 403(b) account before age 59 1/2 your funds may be subject to taxes and early withdrawal penalties," Comella says.

A 403(b) plan is a retirement plan for employees of public schools, nonprofits, and religious organizations. A 403(b) plan is a tax-deferred option that invests your money in annuities and mutual funds. Employers choose how their 403(b) plans are structured and what options employees can pick from.