By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
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Tax-exempt entities share many of the same concerns as other employers in terms of attracting and retaining quality employees. Establishing an effective retirement savings program designed to entice new employees – while also addressing the needs of existing employees – can be a challenge for both tax-exempt and for-profit groups.
Tax-exempt groups have addressed this issue by continuing to generally expand retirement plan benefits and offerings for employees, while also starting to utilize best practice plan features like automatic enrollment, Roth contributions and financial wellness participant tools. An expanding tax-exempt retirement plan market now show retirement plan assets for nonprofits accounting for 30% of the $10 trillion defined contribution retirement plan marketplace.* However, some tax-exempt groups have unique limitations on the type of retirement plan options available to their employees. For example, municipal, state and local government groups are not eligible for certain retirement plan programs, such as 401(k) plans, and have to look at alternative solutions for providing retirement benefits for their employees.
For many local government and state entities (i.e., municipalities, police/fire departments, utility departments, housing authorities, etc.), the 457(b) Governmental plan is a popular option for tax exempt groups in search of a “401(k) look-alike” program for their employees. A 457(b) Governmental Plan is a nonqualified deferred compensation plans that looks and operates very much like a 401(k) plan, permitting employees to make pretax elective deferrals with similar contribution limits. There are some unique provisions with the 457(b) plan that distinguishes it from its corporate counterpart. These include a special catch-up contribution provision for participants that are within three years of retirement, the ability to receive distributions prior to age 59½ without incurring the 10% penalty, and the ability for participants to maximize their contributions to a 457(b) plan without needing to aggregate those contributions with other plans (i.e., 403(b), etc.).
There are also several other versions of the 457 plan that are available to tax-exempt groups (i.e. 457(b) Non-governmental Plan and 457(f) Plan). These programs are specifically designed to benefit solely select management, highly compensated or key employees of the tax-exempt group. And this is all in addition to other, more traditional retirement plan alternatives available to tax-exempt local government and state entities, such as SEP IRAs, SIMPLE plans, and defined benefit plans.
While there may be some restrictions, local government and state entities still have some great options in selecting a retirement program to attract and retain employees. Consult with your tax or legal advisor and investment professional before establishing a new plan or implementing changes to an existing plan.
*Investment Company Institute Research Report, June 2021