Top of Mind

For Plan Sponsors with Choice: Is a 403(b) or 401(k) Plan Right?

Some organizations, like 501(c)(3) tax-exempts, have a choice in the type of retirement plan they offer. For many of these plan sponsors, a 403(b) plan makes the most sense; but for some, a 401(k) may be the right choice. Below are some of the primary factors that may help determine which type of retirement plan is best:

  • Are there Highly Compensated employees? — Highly Compensated employees (HCEs) are those employees who earned over $125,000 in 2019 (the amount is indexed each year). With these types of employees, a 403(b) is likely the better plan choice, since deferrals in a 403(b) plan do not need to be tested for what is called “discrimination.” In a 401(k), if HCEs defer more than other employees, by more than a certain amount, the plan fails this non-discrimination testing, and must refund deferrals back to HCEs. For most employers, this is the most significant factor in determining whether to offer a 403(b) or 401(k) plan.
  • Is there a desire to offer “exotic” investment choices? — If the answer is yes, a 401(k) plan has the edge here, as it allows for individual securities and other investments that a 403(b) plan is unable to offer, due to regulations. Except for 403(b)(9) church plan retirement income accounts, 403(b) plans are limited to fixed annuities, variable annuities, and mutual funds.
  • Is there a for-profit affiliate? — If the organization is a 501(c)(3) tax-exempt that owns or controls a for-profit entity (such as a healthcare entity owning a for-profit physician’s practice), offering a 401(k) plan may be beneficial from an administration perspective, since it is the only plan type that can cover all of your employees. Employees of a for-profit entity cannot participate in a 403(b) plan.
  • Are there employees or other plan participants who pay New Jersey income taxes? — Believe it or not, this makes a difference. My wonderful home state of New Jersey is the only state that taxes 403(b) deferrals, but not 401(k) deferrals. Most states tax neither - although Pennsylvania taxes both! So, if everything else is equal, this might be a factor in determining whether to select a 401(k) or 403(b) plan.

Do you have a topic that you’d like me to cover in a future Top of Mind? Let me know on LinkedIn, Twitter or email me at!

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

Investment products available through Cammack LaRhette Brokerage, Inc.
Investment advisory services available through Cammack LaRhette Advisors, LLC.
Both located at 100 William Street, Suite 215, Wellesley, MA 02481 | p 781-237-2291