Non-Profit 401(k) Plan Guide
Affordable 401(k) services focused on maximizing non-profit benefits.
401(k) Plans for Non-Profits
Historically, non-profit organizations could only offer employees a 403(b) retirement plan. This changed in 1996 when the law was rewritten to allow non-profits the choice between a 403(b) or a 401(k).
A 401(k) plan is still offered mostly by for-profit companies, but there are many non-profit organizations that will choose a 401(k) plan for their employees.
One benefit to having a 401(k) rather than a different retirement plan is flexibility in investment options.
When is a 401(k) Plan Ideal for a Non-Profit?
A 401(k) plan is a great option for larger non-profits due to:
- Cash flow is not an issue
- Large staff
A 401(k) plan allows an organization to provide a retirement contribution match.
Unlike 403(b) plans, the once popular retirement plan option for non-profits, 401(k) plans are legally able to provide contribution matches, however, most employers are unwilling to avoid potentially losing their ERISA exemption.
Through a 401(k), a non-profit can create a more valuable benefit to reward employees, decrease turnover, and increase competitive offers, especially against for-profit organizations.
401(k) Eligibility
In a 401(k) plan, eligibility requirements are set by the employer. Factors that can impact eligibility are:
- Defined minimum age
- Minimum employment period
- Minimum number of hours worked
These eligibility requirements are outlined in the plan document. The defined minimum age is typically 21, with the minimum employment period normally being one year or a minimum number of hours worked of 1,000.
Once an employee is eligible, they can begin making contributions to the plan. Once contributions begin there may still be a vesting period that will dictate when the employer-contributed funds are owned by the employee.
Some vesting is immediate while some can be an increasing percentage over five years or so. The vesting schedule is listed in the summary plan description which can be found on the provider website.
401(k) Nondiscrimination Testing
Unlike a 403(b) plan, a non-profit 401(k) plan will have to go through Average Deferral Percentage (ADP) testing.
This test is designed to monitor the amount a highly compensated employee (HCE) will defer based on the non-HCE staff’s average deferral rate. The non-HCE staff must contribute enough to the plan so that it does not unfairly cater to HCEs.
The only way a 401(k) can be exempt from the ADP testing is to elect safe harbor status, which would require the employer to make contributions to non-HCE staff.
Average Contribution Percentage (ACP) testing is another test a 401(k) must pass if the employer plans to make matching contributions. The ACP test is similar to the ADP testing, it assesses the level of matching contributions made to the HCEs as compared to the non-HCE staff.
A 401(k) plan is a great option for a non-profit organization to incentivize employees to save for retirement. It will give the employer additional flexibility with investment decisions, which may be important to some participants.
The biggest downside would be the testing requirement, but depending on your service team the fiduciary responsibility could be placed on the Third Party Administrator.
It is important for an employer considering a non-profit retirement plan to meet with a specialized financial advisor in order to assess all of the options and put the best plan in place.
Chat With a 401(k) Advisor
Langan Financial Group's 401(k) Plan advisors have over 100 years of experiences servicing retirement plans for organizations.
While he does not practice law on behalf of Langan Financial Group, his perspective has a deeper understanding of navigating regulatory requirements for retirement plans.
Give us a call at 717-288-1880 to see how our local advisors can help with your group retirement plans. Or visit our 401(k) advisor contact page to fill out an inquiry.
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