Similarly, to any other operating business, 501c3 tax-exempt organizations can offer a retirement plan to their employees. 403(b) Retirement plan is designed specifically to benefit employees of 501c3 tax-exempt organizations, employees engaged in the public school system, hospital employees, staff of the uniformed Services university of the Health Sciences; ministries serving religious organizations*.
In its nature 403(b) plan is very close to the 401(k) employer-sponsored retirement plan. The enrollment process is simple. The employer (501c3 tax-exempt organization) sets up the account and the employees contribute a portion of their earnings so they can have money available for them later on. The contributions are generally (pre-tax), unless the employee chooses to make Roth contributions and pays taxes on the contributions, however the withdraw is tax free.
Advantages of 403(b) plan include the following:
- The employees pay less taxes on their income
- The money can grow faster as they are tax-fee until withdrawal
- Employees might be eligible for a credit
- Employers may match employee’s contributions
- Rollovers from a 403(b) plan to a traditional IRA or other non-Roth eligible retirement plans is tax-free.
Disadvantages of the 403(b) retirement plan include the following:
- Limitation of $18,000 an employee can contribute in 2017 or if the employee is 50 or older, the limitation is $24,000 or 100% of compensation whichever is less
- The plan’s investment choices are generally limited
Nevertheless, the advantages and disadvantages, the 403(b) Retirement plan provides a great opportunity for well-managed 501c3 tax-exempt organizations to benefit their employees and give them a chance to save for future and rely on this extra income.
* In order for the ministers to qualify for the plan, they need to meet one of the following requirements:
- Must be employed by a 501c3 organization
- Self-employed ministers (they are treated as employed by a tax-exempt organization)
- Ministers that are not employed by a 501c3 approved organization need to provide day-to-day services to their employers.