When choosing a retirement plan, it is important to understand the difference between 403(b), 403(b)(7), 403(b)(9), and 401(k) plans.
Assuming that your organization is a 501(c)(3) and is either a church or parachurch organization, you qualify for any 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.
A simple way to remember the distinction between these two plans is that 401(k) plans are used exclusively by “for profit” organizations. These organizations fall under ERISA Regulations, which requires that tax-deferred accounts undergo periodic reviews known as discrimination testing. For the 403(b) plan, there is less administrative burden on the organization.
If you are designated as a church by the IRS, always choose the 403(b)(9) plan.
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