Tax Bill Eases Limits on Retirement Plans Offered by Nonprofit Employers

Contained within the massive new tax law are changes to retirement-plan rules that could help nonprofit groups attract and keep employees, especially top executives.

The law puts the kind of retirement plans traditionally offered by nonprofit groups on a par with the ones usually offered by businesses by increasing the amount of money charity employees and employers may contribute to the plans. It also now permits employees to move their retirement savings between different types of plans.

What’s more, the law gives charities the option of offering their executives an extra perk — the ability to set aside more than twice as much money each year than is currently permitted — by allowing contributions to a secondary pension plan.

Those changes could prove to be a boon for nonprofit groups that have struggled to compete with the benefit packages that corporate employers make available to their top executives, charity compensation experts say. Under the law, a charity can contribute up to $11,000 next year, rising to $15,000 by 2006, toward an additional nest egg for its top executives.

The changes “come close to leveling the playing field with the for-profits,” says David W. Powell, a Washington pension attorney.

Private companies can still outspend charities if they want to, Mr. Powell says, because there are no restrictions on how much companies can set aside for their executives in similar deferred-compensation plans. But the extra money the law offers should be adequate for many nonprofit executives, he says.

Stemming Departures

Mike Allison, research director at Compass Point Nonprofit Services, a charitable management-consulting organization in San Francisco, says the pension changes have been long needed. In a survey it conducted two years ago, the group found that 86 percent of nonprofit executives who left their jobs took corporate positions, in part because of inadequate retirement benefits offered by nonprofit groups.

The extra benefits should help nonprofit groups retain their top executives, who are saying, “I’ve got to think of my future, I haven’t got that many productive years left, and I need to accumulate savings” for retirement, says Gary Kaplan, who heads a Pasadena, Calif., recruiting company that specializes in finding executives to lead nonprofit groups.

Mr. Kaplan predicts that the changes will help him persuade corporate executives to take leadership jobs at nonprofit groups. “We often have a tough time closing the deal” with such executives, because the compensation and benefits charities offer have usually been too low compared with what corporations could offer, Mr. Kaplan says.

Increased Savings

Charities, public schools, and colleges have traditionally offered retirement plans governed by section 403(b) of the Internal Revenue Code, but some charities offer 401(k) retirement plans that are common in the corporate world. Money put into the plans by employers and employees is not taxed up to maximum amounts set by law.

The new tax law increases those limits. Beginning next year, workers may contribute up to $11,000 to both types of retirement plans, a figure that will increase gradually to $15,000 by 2006. Workers over 50 have an even higher ceiling, up to $1,000 extra next year, which gradually increases to $5,000 extra by 2006. The law also eliminates restrictions on contributions to pension plans that had been based on a percentage of an employee’s salary, meaning that workers will now be able to contribute as much as 100 percent of their salaries so long as the amount does not exceed the maximum annual contribution limit.

Another significant change is that employees will be able to transfer their retirement savings between different plans, making it easier when workers change jobs. That provision should open up new options for charity workers, says Paul A. Green, a trustee for the pension plan offered by the National Organizers Alliance, which offers its plan to social activists and community organizers. He says that in the past many people have been reluctant to set up a 401(k) plan, which nonprofit groups have been permitted to offer since 1996, because “people don’t want to have two plans.”

The law also simplifies the rules for charitable retirement plans, an important step since the Internal Revenue Service has been cracking down on charities that have failed to follow the complex regulations properly.

For example, limits on how much money can be paid into a 403(b) plan over a lifetime were erased by the new law. These limits, which were based on an employee’s salary, had been a big issue in recent audits of large charities, universities, and teaching hospitals, says Tom Veal, a Chicago pension lawyer. The Internal Revenue Service announced in 1995 that it was cracking down on charities that contributed too much money to retirement plans.