403(b) vs 401(k) for Nonprofits: Which Plan to Offer
Both let employees defer $24,500 in 2026. A 403(b) must be offered to almost every employee, has no deferral test and can avoid ERISA if the employer adds no money. A 401(k) allows stricter eligibility but is tested. One in three charities with staff makes employer contributions.
A 403(b) and a 401(k) are both workplace retirement plans where employees save part of their pay before tax or as Roth, and the employer may add a match. For 2026 both allow employees to defer $24,500, with the same catch-ups. The differences that matter to a nonprofit employer are elsewhere: who has to be offered the plan, whether deferrals are tested, whether ERISA applies, and where the money can be invested. A 501(c)(3) can sponsor either, or both. This page sets the two side by side, explains each difference, and shows from IRS Form 990 data how many charities put employer money into a plan.
403(b) vs 401(k) at a glance
| 403(b) | 401(k) | |
|---|---|---|
| Who can sponsor | 501(c)(3) organizations, public schools, churches | Almost any employer, including any tax-exempt organization since 1997 |
| Employee deferral limit, 2026 | $24,500 | $24,500 (shared with any 403(b) the person is also in) |
| Catch-up at 50 or over | $8,000 | $8,000 |
| Catch-up at 60 to 63 | $11,250 | $11,250 |
| Extra 15-year catch-up | Up to $3,000 a year, $15,000 lifetime, at schools, hospitals, health and welfare agencies and churches | None |
| Total of employee plus employer money | $72,000 or 100% of includible pay | $72,000 |
| Who must be allowed to defer | Nearly every employee (universal availability) | Whoever the plan’s eligibility rules cover, within coverage testing |
| Nondiscrimination test on deferrals (ADP) | No | Yes, unless a safe harbor design is used |
| Test on employer match and contributions | Yes, except governmental and church plans | Yes |
| Can avoid ERISA entirely | Yes, if salary deferral only and hands-off | No |
| What the money can be invested in | Annuity contracts, mutual funds in custodial accounts, and group trusts | No equivalent list in the tax code |
| Roth option | Allowed | Allowed |
| Auto-enrollment required for new plans | Yes, with exemptions | Yes, with exemptions |
Limits are from IRS Notice 2025-67, which sets the 2026 figures. The other rows are explained below, with the IRS or Labor Department source for each.
Who can offer each plan
The IRS says “Generally, public schools, Code Section 501(c)(3) tax-exempt organizations or churches can set up 403(b) plans.” A self-employed minister is treated as employed by a qualifying employer. A 501(c)(4), (c)(6) or other non-charitable exempt organization cannot offer a 403(b).
The 401(k) was closed to tax-exempt employers until 1997. The Small Business Job Protection Act of 1996 opened it to nongovernmental tax-exempt organizations for plan years beginning after 31 December 1996, and the IRS’s final 403(b) regulations, TD 9275, put the result plainly: a section 501(c)(3) organization “can now maintain a section 401(k) plan, a section 403(b) plan, or both.” So the question for a charity is not which plan it is allowed to offer, but which suits it.
Contribution limits for 2026
For employees the two plans are now almost identical:
- Elective deferrals: $24,500.
- Catch-up at 50 or over: $8,000, for a total of $32,500.
- Catch-up at ages 60, 61, 62 or 63: $11,250 instead of $8,000, for a total of $35,750.
- Total employee and employer contributions: $72,000, not counting catch-ups. In a 403(b) the cap is the lesser of $72,000 and 100% of the employee’s includible compensation.
- Compensation that can be counted: up to $360,000.
- Highly compensated employee threshold: $160,000.
The $24,500 is per person, not per plan. The IRS says deferrals to 401(k) and 403(b) plans “must be aggregated”, so someone in both at the same employer, or who changes jobs midyear, has one limit across them. A 457(b) is different: it has a separate limit, which matters for the executive pay arrangement described below.
The 403(b) 15-year catch-up
A 403(b) can offer one extra that a 401(k) cannot. An employee with at least 15 years of service with the same employer can defer more, if the plan allows it, but only where the employer is a public school system, hospital, health and welfare service agency, church or church-related organization. The extra is the least of $3,000, $15,000 minus what the employee has already added under this rule, and $5,000 times their years of service minus their earlier deferrals. In practice the third limb often reduces it to zero for anyone who has deferred heavily, so check the arithmetic before promising it to staff. The IRS’s 403(b) contribution limits page says amounts above the standard limit count first toward the 15-year catch-up and then toward the age-50 catch-up. A food bank, arts group or advocacy charity that is not one of those employer types cannot offer it at all.
Roth catch-ups for higher earners
Under SECURE 2.0, an employee whose prior-year FICA wages from the employer exceeded the threshold must make any catch-up contributions as Roth. For catch-ups made in 2026 the threshold is $150,000 of 2025 wages. Final regulations, announced in IR-2025-91, generally apply from 2027; until then plans follow a reasonable, good-faith reading of the law. A plan with no Roth option cannot take catch-ups from those employees at all, which is a reason to add Roth to either plan.
Who has to be offered the plan
This is the biggest practical difference. A 403(b) is subject to universal availability: if any employee may make elective deferrals, all employees must be allowed to. The IRS’s issue snapshot says “all of the employer’s employees must be given the opportunity to participate.” The plan may exclude only a short list of people:
- employees who normally work fewer than 20 hours a week;
- employees who would contribute $200 a year or less;
- employees who participate in the employer’s 401(k), 457(b) or another 403(b);
- nonresident aliens, and certain students.
Labels do not work. A plan cannot exclude someone because their job title says part-time, temporary or seasonal; the hours test is what counts, and under it an employee who works 1,000 hours or more in a year cannot be excluded. SECURE 2.0 goes further for 403(b) plans covered by ERISA: from plan years beginning after 31 December 2024, IRS Notice 2024-73 says long-term part-time employees, those aged 21 or over with at least 500 hours in each of two consecutive 12-month periods, must be allowed to defer. The employer does not have to match them.
A 401(k) can set its own eligibility rules, such as a year of service and age 21, and exclude groups of employees, as long as it passes the coverage tests. For a charity with high turnover or many short-term program staff, the 401(k)’s flexibility is the main reason to choose it.
Nondiscrimination testing
A 401(k) must pass the Actual Deferral Percentage test each year, which compares how much highly compensated employees defer with everyone else. If the gap is too wide, the plan refunds money to the higher earners. The IRS’s 401(k) overview notes that safe harbor plans, which give everyone a set match or contribution, are “not subject to the complex annual nondiscrimination tests.”
A 403(b) has no ADP test on deferrals; an IRS explanation says flatly that “The ADP test is not used to test discrimination in 403(b) plans.” Universal availability takes its place. This is why a small nonprofit whose executive director wants to defer the maximum, while most staff save little, often prefers a 403(b). Employer money is different: in a 403(b) that is not a governmental or church plan, matching and nonelective contributions must still pass the same 401(a)(4), 401(m) and coverage tests a 401(k) faces.
ERISA, Form 5500 and the hands-off 403(b)
Most 401(k) plans are covered by ERISA, the federal law that sets fiduciary duties, disclosure and reporting. A 403(b) can sit outside it altogether. Under 29 CFR 2510.3-2(f), a 403(b) funded only by employees’ salary reduction is not treated as established or maintained by the employer if:
- participation is completely voluntary;
- only the employee or their beneficiary can enforce the rights under the contract;
- the employer’s involvement is limited to things like letting providers publicize their products, collecting and sending in deferrals, keeping records, and limiting the providers to a number that still gives employees a reasonable choice;
- the employer receives nothing beyond reasonable reimbursement of its costs.
Add an employer match, choose the investments, or run the plan more actively, and the safe harbor is lost: the plan is under ERISA, with a plan document, fiduciary duties and an annual Form 5500. That is the trade. A non-ERISA 403(b) costs almost nothing to run but gives staff no employer money; once you contribute, the administrative difference between a 403(b) and a 401(k) narrows sharply.
For ERISA plans, the size that matters is 100 participants. Below it, a plan can usually file the short form and skip the independent accountant’s audit. Since plan years beginning on or after 1 January 2023, the Labor Department says the count for defined contribution plans is “based on the number of participants with account balances”, not everyone eligible. That change pulled many 403(b) plans with universal availability, where every employee is eligible but few save, back under the audit threshold. A plan audit is separate from the organization’s own nonprofit audit, and a different firm may do it.
What the money can be invested in
The tax code limits where 403(b) money can go. The IRS lists “an annuity contract provided through an insurance company” or a custodial account invested in mutual funds, with retirement income accounts for church plans. SECURE 2.0 amended section 403(b)(7) to add group trusts, the collective investment trusts many 401(k) plans use because they are often cheaper. The securities law change needed to make them usable has not yet been enacted: H.R. 3383, which includes it, passed the House by 302 votes to 123 in December 2025 and was referred to the Senate Banking Committee. Until it becomes law, 403(b) plans generally cannot offer collective trusts. A 401(k) has no equivalent restriction in the code.
Older 403(b) arrangements can have several annuity providers, each with its own contracts and fees, because the hands-off model let employees pick. If you inherit one, ask what each contract charges and whether money can move without surrender charges before you consolidate.
Auto-enrollment for new plans
Since plan years beginning after 31 December 2024, section 414A requires new 401(k) and 403(b) plans to enroll employees automatically at between 3% and 10% of pay, rising by one percentage point a year to at least 10%, and no more than 15%, unless the employee opts out. Plans set up before 29 December 2022 are exempt, as are governmental and church plans, SIMPLE plans, employers in existence for less than three years and employers that have not normally employed more than 10 employees. A small charity starting its first plan will often fall within the exemption; a growing one should budget for the higher participation, and the higher match cost, that automatic enrollment brings.
How many charities put money into a plan
Form 990 Part IX line 8 reports the employer’s contributions to pension and deferred compensation plans, which the Form 990 instructions say include contributions to 401(k) and 403(b) plans. We counted every 501(c)(3) filing the full Form 990 in the IRS’s 2024 extract that had at least one employee on its Form W-3: 156,238 charities. One in three, 32.7%, reported an employer contribution, and the share climbs steeply with size:
| Annual revenue | Charities with staff | Made employer retirement contributions | Median contribution, as % of payroll |
|---|---|---|---|
| Under $250,000 | 20,745 | 6.0% | 3.0% |
| $250,000 to $1 million | 55,116 | 14.8% | 2.4% |
| $1 million to $5 million | 47,185 | 38.0% | 2.3% |
| $5 million to $25 million | 22,698 | 65.5% | 2.6% |
| Over $25 million | 10,494 | 85.3% | 3.5% |
| All | 156,238 | 32.7% | 2.6% |
Payroll here is Part IX lines 5 to 7: officers and key employees, disqualified persons and all other salaries and wages. The median is among charities that made a contribution. Line 8 counts employer money only, so a charity with a deferral-only 403(b) and no match shows nothing; the table is a count of charities that contribute, not of charities that offer a plan, and the real share with a plan is higher. Contributions made only for officers and key employees are reported elsewhere on the form and are not counted.
By headcount the pattern is the same: an employer contribution is the exception among the smallest employers and the norm among the largest.
| Employees on Form W-3 | Made employer contributions |
|---|---|
| 1 to 9 | 15.1% |
| 10 to 49 | 32.4% |
| 50 to 249 | 56.2% |
| 250 to 999 | 77.4% |
| 1,000 or more | 89.6% |
By field, health care leads and animal and religion-related charities trail. Education contributes less often than health care, but more generously when it does, at a median of 3.7% of payroll:
| NTEE major group | Made employer contributions | Median, as % of payroll |
|---|---|---|
| Health care | 54.3% | 2.7% |
| Employment and job training | 43.8% | 2.6% |
| Education | 40.8% | 3.7% |
| Environment | 37.0% | 2.4% |
| Philanthropy, grantmaking | 36.0% | 3.0% |
| Mental health | 33.3% | 2.1% |
| Housing | 31.6% | 2.1% |
| Human services | 30.7% | 2.1% |
| Youth development | 24.8% | 2.0% |
| Arts, culture | 21.3% | 2.2% |
| Recreation, sports | 18.6% | 2.2% |
| Religion related | 17.0% | 2.8% |
| Animal | 16.7% | 1.8% |
Groups with at least 1,000 charities with staff, by the major group of their NTEE code in the IRS Business Master File. Health care includes hospitals, which are covered on nonprofit hospitals.
Two things follow for a small employer. First, offering any contribution at all puts a charity with under $1 million of revenue ahead of most of its peers, which helps hiring; nonprofit salaries has pay data to set it against. Second, the typical contributor puts in about 2% to 3% of payroll, so a 3% match or contribution is a competitive figure, not a token one. Budget it as a line in the nonprofit budget before you announce it.
The alternatives
- SIMPLE IRA. Open to tax-exempt employers with 100 or fewer employees earning $5,000 or more, per the IRS SIMPLE IRA FAQ. Employees defer up to $17,000 in 2026, with a $4,000 catch-up at 50 and $5,250 at 60 to 63. The employer must match up to 3% or contribute 2% for everyone, and it cannot have any other retirement plan. Cheap and simple, but the limits are lower and the employer contribution is not optional.
- 457(b) for executives. A tax-exempt employer can add a non-governmental 457(b), but the IRS says it “must be limited to provide benefits for a select group of management or highly compensated employees” and must remain unfunded, so the money stays available to the organization’s general creditors. The 2026 limit is $24,500, separate from the 403(b) limit, so an executive can defer in both. It is often used to retain a long-serving executive director; it should be approved by the board and recorded, for which the board resolution templates help.
- 457(f). A deferred pay arrangement for executives that can allow deferrals above the normal annual limit. The money must be subject to a substantial risk of forfeiture, and becomes taxable when that risk is removed. It needs specialist advice, and deferred pay for officers is reported on Form 990; nonprofit executive compensation covers how that is reviewed.
Which to choose
| Your situation | Usually points to |
|---|---|
| Small staff, no budget for a match, want minimal admin | A salary-deferral-only 403(b) that stays outside ERISA, or a SIMPLE IRA |
| A few well-paid staff who want to defer the maximum | 403(b): no ADP test on deferrals |
| Want to exclude some staff from the plan entirely | 401(k): universal availability makes this hard in a 403(b) |
| Long-serving staff at a school, hospital or health and welfare agency | 403(b): the 15-year catch-up is only available there |
| You run a for-profit subsidiary and want one plan across both | 401(k) |
| Want a match with no annual testing | Either, using a safe harbor design |
| Under 100 employees, want something simple with a required employer contribution | SIMPLE IRA, as long as it is your only plan |
| An executive director wants to save beyond the 403(b) limit | Add a 457(b) for a small top-hat group |
For most small charities the honest sequence is: start with a salary-deferral-only 403(b) kept outside ERISA, which costs little and lets staff save; when there is budget for employer money, add a match and accept ERISA, choosing then between a 403(b) and a 401(k) on the eligibility and testing points above. Revisit the choice when you cross 100 participants with balances, when you add a for-profit subsidiary, or when the auto-enrollment mandate applies.
Whatever you pick, put the plan’s eligibility rules into the employee handbook alongside your other nonprofit policies, choose a payroll provider that can send deferrals to the plan promptly (see nonprofit payroll software), and check that workers paid as contractors really are contractors, since a misclassified employee is still an employee for universal availability: can a nonprofit hire independent contractors.
Common mistakes
- Excluding part-time staff by label. A 403(b) cannot exclude “part-time” or “temporary” employees as a class; only the 20-hour, $200 and other listed exclusions work, and long-term part-time rules apply to ERISA plans.
- Losing the ERISA safe harbor without noticing. Adding a match, or picking the funds for employees, brings the plan under ERISA. Then it needs a plan document, a Form 5500 and a fiduciary process.
- Offering the 15-year catch-up where it does not apply. Only schools, hospitals, health and welfare agencies and churches qualify.
- No Roth option. From 2026, higher earners can only make catch-ups as Roth, so a plan without Roth blocks them.
- Treating the plan as a benefit for executives only. Both plans are for all eligible staff; a plan for a small group of executives is a 457(b) or 457(f), with different rules.
- Not reporting it. Employer contributions go on Form 990 Part IX line 8, and officer contributions in Part VII and Schedule J; the Form 990 guide explains where.
Limits are from IRS Notice 2025-67. Plan rules are from the IRS 403(b), 401(k), SIMPLE IRA and 457(b) pages, Treasury Decision 9275, IRS Notice 2024-73, 26 USC 403, 414 and 414A, 29 CFR 2510.3-2(f) and the Labor Department’s 2023 Form 5500 fact sheet, with the status of H.R. 3383 from Congress.gov. The data is our analysis of the IRS 2024 Form 990 extract with bin/analyse_soi_retirement.py. All read on 24 October 2026. This page compares the rules; it is not legal, tax or investment advice for a particular plan, and a plan’s own document and provider govern what it allows.
Questions people ask
Is a 403(b) the same as a 401(k)?
They work the same way for employees, with the same 2026 deferral limit of $24,500. They differ on who can sponsor them, who must be offered the plan, testing, ERISA and investments.
Can a nonprofit offer a 401(k)?
Yes. Nongovernmental tax-exempt organizations, including 501(c)(3)s, have been able to sponsor 401(k) plans since 1997, and a charity can offer a 401(k), a 403(b) or both.
Can I contribute to a 403(b) and a 401(k) in the same year?
Yes, but your deferrals to both count toward one $24,500 limit in 2026. A 457(b) has a separate limit.
What is the 403(b) contribution limit for 2026?
$24,500 of employee deferrals, plus $8,000 at 50 or over or $11,250 at ages 60 to 63, and up to $72,000 in total with employer money.
Does a 403(b) have to cover all employees?
Nearly all. Universal availability means anyone may defer if anyone can, except listed groups such as those normally working under 20 hours a week.
Does a 403(b) have to follow ERISA?
Not if it is funded only by employee salary deferrals and the employer stays hands-off under the Labor Department safe harbor. An employer match brings it under ERISA.
Do nonprofits match 403(b) contributions?
About a third do. 32.7% of charities with staff filing the full Form 990 reported employer retirement contributions in the 2024 IRS data, from 6.0% of the smallest to 85.3% of the largest.
How much do nonprofits contribute to retirement plans?
The median charity that contributes puts in about 2.6% of payroll, according to our analysis of the 2024 IRS Form 990 data.
What is the 403(b) 15-year rule?
An extra catch-up of up to $3,000 a year, $15,000 lifetime, for employees with 15 years at a school, hospital, health and welfare agency or church, if the plan allows it.
Is a SIMPLE IRA better for a small nonprofit?
It can be, for 100 or fewer employees, but the employee limit is lower, $17,000 in 2026, the employer must contribute, and it must be the only plan.
This is reference information, not legal or tax advice. Rules vary by state and change over time. For a decision that carries real consequences, check the current text at irs.gov or your state registry, and talk to a nonprofit attorney or CPA.