The purpose of a Faith-Based Retirement Plan is to prepare Participants financially for a lifetime of ministry.
What Are The Benefits Of Roth IRA And Roth 403(B) Plans?
Roth IRAs and 403(b)s
Roth IRAs are retirement plans that can be used by anyone while Roth 403(b)s are retirement plans that are offered by the employer.
While there are no income restrictions for those who can contribute to a Roth 403(b), a Roth IRA does have income requirements that determine who is able to open an account. It’s also important to note that the maximum contributions limits for Roth 403(b)s are much higher than for Roth IRAs.
Roth Benefits
The benefits of a Roth 403(b) and Roth IRA are that principle and earnings grow tax free so there will be no taxes taken at the time of distribution if you are at least 59 ½ and have had the Roth account for 5 years. But this does mean that they are funded with money from your paycheck after taxes have been taken out. You don’t get the tax-break upfront, but you also won’t have to pay taxes when you take money out.
If you do not have access to a Roth 403(b), then a Roth IRA is the next best choice. The Roth 403(b) allows you to contribute more, but contributing up to the IRA limit is better than not contributing at all. It’s also important to remember that many small employers, ministries, or faith-based organizations don’t have the money or experience to offer a retirement plan at all, let alone one with either a basic or matching contribution.
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Learn more about Church Retirement Plans.
Along with faith-based retirement plans, Envoy also offers faith-based IRAs.
Understanding ERISA Versus Non-ERISA Retirement Plans
What are ERISA Plans
ERISA organizations are subject to the rules put into effect by The Employee Retirement Income Security Act of 1974 (ERISA). This is a federal law that is intended to provide protection to participants in a retirement plan by identifying reporting requirements, fairness procedures, and fiduciary requirements that plan sponsors and other fiduciaries must follow when setting up a retirement plan. These requirements are considered best practice for all organizations; however, these requirements do not directly apply to Non-ERISA Plans.
The primary functions of ERISA include:
Requiring the disclosure of financial and other information concerning the plan to participants and their beneficiaries;
Establishing standards of conduct for fiduciaries;
Employers can contribute to the plan and match their employees contributions; and
Providing for appropriate remedies and access to the federal courts.
ERISA regulations are very informative and add a high protection value to either a 403(b) or 401(k) Plan. 401(k) retirement plans are generally subject to ERISA.
What are Non-ERISA Plans
Not all 403(b) retirement plans are subject to ERISA. 403(b) plans sponsored by church plans and governmental plans are exempt from ERISA, but may elect ERISA coverage if they want it. Such plans are commonly referred to as Non-ERISA plans. Non-ERISA 403(b) plans do not involve employer contributions, involve voluntary plan participation only, and do not need to follow the stipulations of the Act.
Some advantages of Non-ERISA plan include:
A non-ERISA plan does not need to provide a Summary Plan Description (SPD) to participants.
A non-ERISA plan is not subject to annual 5500 reporting.
A non-ERISA plan with over 100 participants does not require an annual audit.
A non-ERISA plan is not subject to the strict ERISA fiduciary standards, but it is subject to state law and other standards.
What is a Non-ERISA 403(b)(9) Plan
A Non-ERISA 403(b)(9) plan functions differently than a Non-ERISA 403(b) plan.
As stated above, in a Non-ERISA 403(b) plan, the employer does not contribute to the plan. This is not the case for a Non-ERISA 403(b)(9) plan. In a 403(b)(9) plan, not only can the employer contribute, but they can decide whether to use universal availability or to choose which employees are allowed to participate in the plan.
Non-ERISA 403(b)(9) Plan Eligibility
With universal availability, all employees are eligible to participate in the plan on a voluntary basis upon hire. There are no age or service requirements permitted with regards to these employee contributions.
The employer also has flexibility in determining which employees are eligible. As an example, an employer may impose age and/or service requirements before an employee can participate in the plan.
Non-ERISA 403(b)(9) Church Plans
Another parameter around this distinction is that all Church Plans are considered Non-ERISA. Therefore, if your organization is a church, you want to ensure that you have a 403(b)(9) Church Plan, which provides certain tax advantages and flexibility. In order to qualify for a 403(b)(9) plan, your church must be 501c3 organization with a determination letter from the IRS indicating their status as a church.
In Conclusion:
ERISA plans need to conform to the 403(b) or 401(k) regulations as established by the Internal Revenue Service and the ERISA regulations as established by the Department of Labor. ERISA does not usually cover retirement plans for government and public education and religious organizations.
Non-ERISA plans need to conform to the 403(b) regulations as established by the Internal Revenue Service.
Learn more about Church Retirement Plans or consult a professional service member for more information.
Church Retirement Plans
What is a 403(B)(9) Retirement Plan?
You may already know what a 403(b) retirement plan is and why you might choose it over a 401(k) plan. But do you know what a 403(b)(9) plan is? How do you know if it’s right for your ministry?
Simply stated, 403(b)(9) plans are for churches, or those with 501(c)(3) church status, while 403(b) and 403b(7) plans are for everyone else. There is no reason to use a 401(k) plan when you are a non-profit 501(c)(3)—church or not.
What Are the Benefits of a 403(b)(9) Plan?
One of the biggest benefits of 403(b)(9) plans is that they offer the Minister’s Housing Allowance distribution at retirement. This allows a minister who is ordained, licensed, or commissioned to receive a designated portion of their salary that is excluded from gross income and not subject to federal income tax.
Most plan sponsors are not aware of this specific rule that gives the minister to a 403(b)(9) church plan these tax saving benefits:
All monies contributed are made pre-state tax
All monies contributed are made pre-federal tax
All monies contributed are made pre-SECA tax—a 15.3% tax savings
403(b)(9) Plans are also not subject to certain ERISA requirements.
The 403(b)(9) plan is less expensive to administer and requires less reporting and testing. These plans DO NOT fall under ERISA regulations, which requires that tax-deferred accounts undergo periodic reviews known as discrimination testing. This saves the cost of an audit, form preparation, and testing requirements.
Not sure if you have a 501(c)(3) church status?
Reference your determination letter from the IRS. This notification will state whether you are classified as a church under section 501(c)(3) of the Internal Revenue Code.