What about the other Defined Contribution Plan?
I have been talking quite a bit about the 401(k) plan and how congress has been trying to “change” it for the better. Well, let’s take a look at the non-profit cousin of the 401(k) plan…the 403b.
Non-Profits Only
The 401(k) defined contribution plan is used by companies and organizations that are set up to make a profit. Companies like Microsoft, Ford, and GE etc. You get the picture. Just so you remember what a defined contribution plan is, it is a tax deferred or tax delayed retirement plan where you define or tell your employer how much you want to put into your account directly from your paycheck.
Now in reality all organizations in the United States are set up to make a profit even the so called non-profits. If they didn’t make a profit they wouldn’t be in business very long.
However, under “special” circumstances the IRS, usually under section 501c3 but not always, allows an organization to be set up as a non-profit or not-for-profit organization because of the benefits they provide to the general public. Think about the American Heart Association, the Cancer Society, the Salvation Army and so many others. This is good.
When the defined contribution regulations were set up sometime back in the 1950’s, from what I could determine, it was decided that “for profits and not-for-profits” would have similar but different plan setups. Actually our parent’s pension plans were mostly available then and were called “defined benefit” plans…a topic for another blog post. This has changed considerably over the years and now the 401(k) and 403b have become prevalent and quite similar but still not the same.
Prior to January of 2009, 403b plans were a hodgepodge of rules and regulations and vendors and confusing formulas and not much participation or help from a lot of the employers that provided them for their non-profit employees.
Many public school, hospital, and university systems had so many vendors (companies) selling their 403B plans that the employees and the payroll departments of the organizations were often overwhelmed with how the plans worked. I know this from firsthand experience working for one of these vendors.
Small public school systems could have upwards of 50 or more vendors chasing after several hundred eligible employees. It was a nightmare for the employees, payroll departments of the schools, and administrators.
Things are getting better
Since January of 2009, some key changes have taken place. Now a written plan document is a requirement. Information sharing agreements are now taking place between vendors. And another key area that was changed is the so-called 90-24 transfers. These were transfers of your 403b monies that you could make to an outside vendor for one reason or another. Maybe you didn’t like the current vendor or the sales rep handling your account or they didn’t give you enough choices or just plain lousy service. The 90-24 transfer can be very confusing so work with an experienced financial advisor to help you make the transfer.
Keep in mind that this 90-24 transfer means moving your money from your 403b account with your current vendor company directly to another vendor company without you ever getting your hot little hands on any of the money. If it is not handled this way then you could have a taxable event along with a host of IRS penalties and a lot of headaches. Be careful very careful when doing the transfer.
Also improving with 403b plans is the language used by the vendors within the plans. Many of the vendors are working together to try and use similar language within the 403b plans. This will help to prevent confusion with you… the plan participant. And this will also help the payroll and administrative departments of the non-profit organization. About time!
As I have stated with the 401(k) plan in previous articles, I think the 403b plan with the right vendor company can be a tremendous retirement asset for you. If you are not currently involved in your organization’s 403b program you are not taking advantage of a good financial opportunity.
Even if you put the bare minimum amount into a 403b program, with the tax savings and growth of the interest which is tax deferred, you will benefit financially over the years.
So what are you waiting for? Contact your payroll department or Treasurer’s office and sign up for your organization’s 403b plan today.
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