Choosing a Retirement Plan for Your Small, Faith-Based Organization

Small, faith-based organizations play an important role not only in their communities, but also for their employees. As an employer, you have a significant opportunity to provide meaningful retirement benefits that meet the specific needs of your employees and support their financial futures.

As you work to select and offer a retirement plan for your employees, you may face certain decision points that secular employers do not. You may also find that while there are many strong service providers who help small employers in this process, there are fewer who have experience specifically helping faith-based employers.

This guide is designed with these unique considerations in mind.

Understanding Your Structure

Before you select a retirement plan for your employees or begin working with a service provider, talk to your tax and legal advisors to fully understand your organization's corporate structure. Make sure you know if it is a corporation, a partnership, or a sole proprietorship, and whether it is a for-profit or nonprofit organization.

• Important notes about church plans

  • The IRS uses the term “church” to generically refer to a place of worship, including a synagogue or mosque, or other religious organizations that have similar characteristics.
  • Despite their name, church plans can be sponsored by certain faith-based nonprofits that are not formal houses of worship.
  • On the other hand, being a faith-based employer doesn’t automatically mean you’re eligible to sponsor a church plan.

  Take a look at the characteristics the IRS looks for in its definition of a church, or go in-depth and read its 501(c)(3) Tax Guide for Churches & Religious Organizations.

You should also ask about its affiliation with a church and its taxable or tax-exempt status under the Internal Revenue Code. Tax-exempt, faith-based entities may be eligible to sponsor certain types of plans, such as church plans, that are not available to other organizations.

Ask your tax and/or legal advisors: Are we “controlled by” or “associated with” a particular church or convention or association of churches? Are we a tax-exempt organization under section 501 of the tax code?

The answers may help determine whether the plan you wish to offer will be a church plan.

Make sure you communicate the details about your corporate structure to your selected service provider so they can help match you with the right type of plan.

Choosing a Plan

• Important notes about church plans

  • If you meet the IRS designation of a church, a convention or association of churches, or an organization controlled by or associated with a church, then you may be eligible to offer any of the below plans, and it may be considered a “church plan.”
  • Church plans are exempt from Title I of the Employee Retirement Income Security Act (ERISA) and from certain provisions of the Internal Revenue Code.
  • However, under an Internal Revenue Code provision, employers may elect to treat a church plan as subject to ERISA and the Code. Electing ERISA coverage provides enhanced protection for participants, such as disclosure requirements and defined fiduciary standards. It also offers a more formal, organized plan structure, which may be beneficial for plan administration.

Most private-sector retirement plans fall into three categories: IRA-based plans, single-employer defined contribution plans, or single-employer defined benefit plans. You can select from these options. But there are also other alternatives that may make sense for you.

For example, unrelated employers can join a pooled employer plan to offer their workers a retirement plan, and nonprofits, including church-related organizations, may offer certain 403(b) plans to their employees.

Most of these options allow employees to make tax-deferred contributions, and if permitted under the plan, taxable contributions may be made to Roth accounts.

Offering a thoughtful retirement savings option reflects your commitment to your employees and their futures. The information below can help you choose the type of plan that best fits your faith-based organization, whether it is for-profit or non-profit.

IRA-based plans

People tend to think of Individual Retirement Arrangements (IRAs) as something that individuals establish on their own, but an employer can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the earnings (or losses) on those funds.

SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA plan

A SIMPLE IRA plan is generally easier than other plans to set up and maintain, but this option is only available to businesses with 100 or fewer employees. The employer either matches employee contributions or contributes a fixed percentage. Employers may be eligible for a tax credit.

Key advantages: It’s a simple salary reduction plan for small employers with low start-up and annual costs, plus little administrative paperwork.

Employer’s role:  You must choose either to match employees’ contributions or to contribute a fixed percentage of pay. There is no annual filing requirement, and the bank or financial institution handles most of the paperwork once you select a plan document.  

Read more about SIMPLE IRA plans.

Simplified Employee Pension (SEP) plan

SEP arrangements can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees.

Key advantages: You decide how much to contribute under the SEP each year – offering you some flexibility when business conditions vary. Contributions under a SEP arrangement by for-profit organizations are tax deductible by the employer.

Employer’s role: Under most SEP arrangements, only the employer contributes to the IRAs of its employees. You can easily set up the plan by using an IRS model form and then forwarding contributions to your financial institution for the employees who participate. There is no annual filing requirement.

Read more about SEP plans.

Payroll Deduction IRA

The employee is in the driver’s seat with payroll deduction IRAs, and employers are minimally involved. Workers make the decisions about whether, when, and how much to contribute, up to the annual limit.

Key advantages: These IRAs are fairly effortless, and they’re an easy way to encourage employees to start saving.

Employer’s role: Your employees set up an IRA, and you withhold their desired payroll deduction amounts and send them to the financial institution. There is no annual filing requirement. As long as the employer keeps its involvement to a minimum, the program will not be treated as an employer retirement plan.

Read more about payroll deduction IRAs.

401(k) plans

These employer-established plans do not promise a specific benefit at retirement. Instead, employees or their employer (or both) contribute. At retirement, an employee can receive the accumulated contributions plus investment earnings (or minus losses).

Traditional 401(k)

Traditional 401(k) plans offer employers a great deal of flexibility. You can decide whether to contribute for all participants, to match employees’ deferrals, to do both, or to do neither. Employer contributions can be subject to a vesting schedule.

Key advantage: It allows a high level of salary deferrals by employees.

Employer’s role: These plans have a higher level of administrative complexity than some other options. You may want to get advice from a service provider to set up a traditional 401(k). It has annual nondiscrimination testing and annual filing requirements.

Read more about 401(k) plans.

Safe harbor 401(k)

In exchange for avoiding annual nondiscrimination testing, employees in safe harbor 401(k) plans must receive a certain level of employer contributions. Under the most popular type, employees are immediately vested in employer contributions.

Key advantages: It allows a high level of salary deferrals by employees without requiring annual nondiscrimination testing.

Employer’s role: Like traditional 401(k) plans, you may want to get advice when establishing this type of plan. Annual filing is required, but annual nondiscrimination testing is not. Unlike with the traditional 401(k) plans, employers offering safe harbor 401(k) plans must make specified contributions.

Automatic enrollment 401(k)

An automatic enrollment 401(k) plan allows you to automatically enroll employees and place their salary deductions in certain default investments unless they elect otherwise.

Key advantages: It provides a high level of participation and may provide safe harbor fiduciary relief for qualified default investments.

Employer’s role: You pick the type of automatic enrollment 401(k) plan and place participants’ contributions in a default investment, unless a participant directs their investments. Annual filing is required, but whether annual nondiscrimination testing is needed and whether you must make specified contributions depends on which type of plan you select.

Read more about automatic enrollment 401(k) plans.

403(b) plans

• Important notes about 403(b) plans

  • Your organization must be tax-exempt under Internal Revenue Code section 501(c)(3) before it can offer a 403(b) plan.
  • Your status as a church or church-related organization that is eligible to offer a church plan is also based on Internal Revenue Code requirements.

Organizations that are tax exempt under Internal Revenue Code section 501(c)(3), such as certain nonprofits and churches, can offer 403(b) plans, which are defined contribution plans that may have fewer administrative requirements and more flexibility compared to many other retirement savings options available to all small employers.  

403(b) plans are exempt from Title I of ERISA if they qualify as “church plans”¹ or if they meet certain safe harbor conditions. The safe harbor requires that:

• the plan is funded solely through salary reduction agreements or agreements to forego increases in salary,
• employee participation is completely voluntary, and
• employer involvement is limited. 

Read more about 403(b) plans on the IRS website.

403(b)(1) and 403(b)(7) arrangements

A 403(b)(1) plan is limited to investing in annuity contracts, while a 403(b)(7) plan lets participants contribute to a custodial account that invests in mutual funds.

Key advantage: These plans may be simple to manage if you partner with a service provider that handles the administrative duties.

Employer’s role: There must be a written plan for these arrangements, even if it is a church plan. If the plan does not rely on meeting the safe harbor conditions, employers may make contributions and have greater involvement in the plan.

403(b)(9) retirement income accounts

This plan provides tax-deferred retirement income accounts for employees of churches and certain church-related organizations. Contributions can be made to various investments, in addition to mutual funds and annuity contracts.

Key advantages: These plans can offer flexibility and customization in investment options and plan design. Plus, a housing allowance tax exclusion on retirement distributions may apply for retired clergy members.

Employer’s role: First, you must ensure your organization is an eligible church or church-related organization that is qualified to offer this type of plan. There must be a written plan. Then, you can offer and contribute to the plan. Other requirements will apply if you elect ERISA coverage.

Pooled employer plans (PEPs)

A PEP is an individual account defined contribution retirement plan that provides benefits to the employees of at least two employers that do not have a common interest other than adopting the plan. PEPs must be sponsored and administered by a pooled plan provider.

Key advantages: A PEP can offer small employers a 401(k)-style plan with reduced burdens and costs compared to sponsoring their own separate plans.

Employer’s role: You must select the PEP and review its terms, which must designate a pooled plan provider that will assume the fiduciary responsibilities of a plan administrator. You are also required to monitor the provider.

Read more about pooled employer plans.

Defined benefit plans

Defined benefit plans promise a specified benefit at retirement, such as $1,000 a month for life or an account balance an employee could take as a lump sum at retirement. The amount is sometimes based on a set percentage of pay multiplied by the number of years the employee worked for the employer offering the plan. Employer contributions must be sufficient to fund promised benefits.

Key advantages: Employers can generally contribute (and therefore deduct) more each year than in defined contribution plans—and employees often value the predictable benefit.

Employer’s role: You are responsible for any of the plan’s financial losses, so you will want to get advice from a service provider. There are annual filing requirements, and you must have an actuary determine your annual contributions. You’ll also need to pay an annual premium to the Pension Benefit Guaranty Corporation to help fund the insurance program that protects these promised benefits.

Footnote:

¹ A plan established on or after December 29, 2022, must provide for automatic enrollment, unless the plan is a church plan as described in Code section 414(e) or another exception applies. However, a church plan may still automatically enroll employees and place their salary deductions in certain default investments unless they elect otherwise. The rules for automatic enrollment 401(k) plans and automatic enrollment 403(b) plans are similar.