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All ministry decision makers, particularly the CFOs, Executive Directors, and Business Managers carry the burden of protecting the organization.
These key decision makers are not only responsible for protecting their organizations, but also overseeing a variety of critical actions that must be done correctly. In many ways, it is the most challenging of times.
Choosing between a 403(b) and a 401(k) retirement plan:
Identifying the key parameters of your plan’s oversight makes your job easier. Understanding the distinction between 403(b) and 401(k) plans is a good place to start.
Assuming that your organization is a 501(c)(3) and is either a church or parachurch organization, you qualify for either of these retirement plans under IRS regulations. So, why chose one over the other?
In its simplest form, the 403(b) is cheaper to establish and administer. The primary reason is due to the fact that 403(b) plans require less reporting and testing. We have seen that a majority of 401(k) plans are often recommended by advisors not familiar with 403(b) plans and how they can benefit ministry organizations.
Another reason for the recommendation of a 401(k) plan over a 403(b) plan by advisors is because they are associated with vendors that do not support a 403(b) platform. A simple way to remember the distinction between these two plans is that 401(k) plans are used exclusively by “for profit” organizations, as all of these organizations fall under ERISA Regulations.
Understanding ERISA versus Non-ERISA retirement plans:
ERISA organizations are subject to the rules promulgated by The Employee Retirement Income Security Act of 1974 (ERISA). This act identifies reporting requirements, fairness procedures, and fiduciary requirements. These requirements are considered “best practice” for all organizations; however, these requirements do not directly apply to Non-ERISA Plans.
Non-ERISA plans are those 403(b) plans that involve voluntary plan participation only. In other words, the employer is not contributing. Another parameter around this distinction is that all Church Plans are considered Non-ERISA. From here on out we will refer to Non-ERISA plans as Church Plans.
Therefore, if your organization is a church, you want to ensure that you have a 403(b)(9) Church Plan. If your organization is not a church, and makes plan contributions of any kind (also known as “matching”), your retirement plan falls under the ERISA oversight rules. We hasten to say, that the ERISA regulations are very informative and add a high protection value to either a 403(b) or 401(k) Plan.
How is a 403(b)(9) different from a 403(b) retirement plan?
The bottom line is that 403(b)(9) plans are for churches, or those with 501(c)(3) church status, while 403(b) plans are for everyone else. There is no reason to use a 401(k) plan when you are a non-profit 501(c)(3) - church or not.
Not sure if you have a 501(c)(3) church status?
Reference your determination letter from the IRS. Within this letter, the IRS will state that they have determined that you are exempt from Federal Income Tax under section 501(c)(3) of the Internal Revenue Code.
Highlights of a 403(b)(9) Church Plan
Participation Flexibility - Church Plans are allowed to choose which employees or group of employees will receive employer retirement plan contributions. Further, the church can decide how much each person, or categories of persons, will receive contributions. You can discriminate.
Housing Allowance - Allows Participants to take non-taxable, ministerial housing allowance distributions in retirement from their 403(b)(9) plans, a big tax break.
Pre-SECA Tax - All monies contributed by the Participant with a ministerial status are made Pre-SECA tax. This is another large tax advantage for those who qualify and are not “opted out” of social security.
As you can see, the flexibility to choose who participates and how much they receive are big distinguishing characteristics of Church Plans. Note: Because of the ROTH option, Participants can contribute after-tax, meaning they will not have to pay tax on that money when it is time to use it in retirement.
Your “Quick Start” Compliance Checklist
Plan Administrators and Executive Leaders have an enhanced level of responsibility due to the influence that they project on the organization’s plan design or administration. A great place to start is to make sure that the following items are in place:
The basics of the retirement plan are fully understood.
The way the retirement plan operates is fully understood.
There is regular & consistent plan oversight of the retirement plan and its investments.
Fiduciary roles are understood and fully appreciated.
The responsibility for overseeing and managing your plan well is a privilege of leadership as well as a key responsibility. When you have a Plan Administrator in place, your plan is supported by a Retirement Plan Oversight Team, and when you are on the same page as your Plan Administrator, you will sleep very well at night!
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