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Non-Profit Plans

A §403(b) plan is a deferred compensation program offered to employees of certain public educational institutions and tax-exempt organizations under IRC §501(c)(3). An "educational organization" includes primary, secondary, preparatory or high schools, colleges and universities. It also includes Federal, State and other public supported schools. If the organization is engaged in both educational and non-educational activities, it will only qualify as an educational organization if the non-educational activities are incidental to the educational activities.

A qualified employer under IRC §501(c)(3) tax-exempt organization is organized and operated exclusively for religious, charitable, scientific, public safety testing, literary, educational purposes, to encourage national or international amateur sports competition, or for the prevention of cruelty to children or animals. A non-profit employer not organized under IRC §501(c)(3) may not establish a §403(b) plan.

The majority of §403(b) programs are salary reduction only or non-ERISA plans. These plans are not subject to the complex reporting and disclosure requirements imposed upon ERISA plans. Until recently, employees of a qualified employer could establish a tax-deferred plan and the employer had little involvement in the administration of the Plan.

On July 24, 2007, IRS issued final regulations governing plans established under §403(b) of the Internal Revenue Code, representing the first comprehensive guidance since 1964.

Generally, the regulations were effective for years beginning after December 31, 2008; however, employers were required to begin the process of modifying their plan policies and procedures several months in advance to ensure compliance by January 1, 2009.

An ERISA §403(b) plan is generally one that includes involvement from the employer and may provide certain contributions from the employer. While some employers such as public schools and universities are exempted under ERISA, a plan subject to ERISA must comply with additional rules and reporting requirements. Non-profit employers should be familiar with the regulations that govern ERISA plans.