Retirement Plan Options for Tax Exempt Entities

5/1/2014

401(k) :

Employee makes elective deferral contributions to the plan up to the annual maximum ($17,500 in 2014). Employer may choose to contribute. Employer and Employee contributions cannot together exceed an annual limit ($52,000 in 2014) or 100% of compensation. If an employee is age 50 or over he or she may defer an additional amount ($5,500 in 2014). Employer must pass minimum coverage test. Withdrawals are permitted after a distributable event occurs (e.g. retirement, death, disability, severance from employment). Early withdrawals are subject to 10% additional tax. Plan may permit loans and hardship withdrawals. Rollovers are permitted any time to an eligible retirement plan or an IRA. Employee elective deferral contributions are immediately 100% vested but employee contributions will vest according to plan terms. Annual filing of Form 5500 is required. May require annual nondiscrimination testing to ensure the plan does not discriminate in favor of highly compensated employees.

403(b):

Only available to public education employers or 501(c)(3) organizations. Employee makes elective deferral contributions to the plan up to the annual maximum ($17,500 in 2014). Employer may choose to contribute. Employer and Employee contributions cannot together exceed an annual limit ($52,000 in 2014) or 100% of compensation. If an employee is age 50 or over he or she may defer an additional amount ($5,500 in 2014). There is a special additional catch-up contribution allowed for the employees of selected employers. Employer must pass minimum coverage test. Withdrawals are permitted after a distributable event occurs (e.g. retirement, death, disability, severance from employment). Early withdrawals are subject to 10% additional tax. Plan may permit loans and hardship withdrawals. Rollovers permitted to an eligible retirement plan and transfers are permitted from one 403(b) to another. Employee elective deferral contributions are immediately 100% vested but employee contributions will vest according to plan terms. If employer contributions are made, annual filing of Form 5500 is required.

457(b) Tax-Exempt Organizations (Non-Church):

Employees may make salary reduction contributions and employer may choose to contribute. Employee and employer contributions together may not exceed a certain amount per year ($17,500 in 2014). There is no age 50 catch-up contribution, however, there is a special 457 catch-up which allows a participant to make an additional contribution 3 years prior to normal retirement age which equals the lesser of (a) twice the annual limit ($35,000 in 2014) or (b) the basic annual limit plus any underutilized portion of the basic annual limit for prior years. Employers must offer this type of plan to a selected group of management or highly compensated employees. There is no requirement that an employer pass the minimum coverage test. Withdrawals permitted after severance from employment. Plan may not permit loans. No rollovers are permitted but participants may make a post-severance transfer from one tax-exempt 457(b) plan to another. Employee and employer contributions must be subject to the claims of creditors.

Defined Benefit Plan:

Primarily funded by employer. Plan benefits are subject to nondiscrimination testing. Plan must also pass the minimum coverage test. Withdrawals are permitted after a distributable event occurs (e.g. retirement, death, disability, severance from employment). Early withdrawals are subject to 10% additional tax. Plan may permit loans. Generally benefits can be rolled over to another qualified plan that accepts rollovers or to an IRA. Vesting is determined by the plans terms. Annual filing of Form 5500 is required and an actuary must determine annual contributions.

SIMPLE IRA Plan:

Only available to employers that do not maintain another plan and have 100 or fewer employees. Employee can decide how much to contribute, up to the annual maximum ($12,000 in 2014) and employer must make matching contributions (generally 100% match of first 3% of compensation) or contribute 2% of each eligible employee’s compensation. An employee who is age 50 or over may make an additional contribution ($2,500 in 2014). Must be offered to all employees who have compensation of at least $5,000 in any prior 2 years and are reasonably expected to earn at least $5,000 in the current year. Withdrawals permitted at any time subject to federal income taxes plus an additional 10% tax if employee has not yet reached age 59 ½ (25% if less than 2 years of participation). Loans are not permitted. Rollovers permitted from one SIMPLE IRA to another any time but a rollover from a SIMPLE IRA to an eligible retirement plan can only be made tax-free after 2 years of participation in the SIMPLE IRA Plan. Employee and Employer contributions are immediately 100% vested. No annual filing requirement

Simplified Employee Pension Plan (SEP):

Allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. Employer contributions only. Employer may contribute up to 25% of compensation but no more than the maximum annual limit ($52,000 in 2014). Must be offered to all employees who are at least 21 years of age, have been employed by the employer for 3 of the last 5 years, and have had compensation of a certain amount ($550 in 2014). Withdrawals permitted at any time subject to federal income taxes plus an additional 10% tax if employee has not yet reached age 59 ½. Loans are not permitted. Rollovers are permitted from one IRA to another and to an eligible retirement plan. Contributions are immediately 100% vested. No annual filing requirement.

Payroll Deduction IRA:

Employer arranges for employee to make payroll deduction contributions of an amount specified by the employee up to the maximum annual contribution ($5,500 in 2014). If an employee is over age 50 he or she can make an additional $1,000 catch-up contribution. Withdrawals permitted at any time subject to federal income taxes plus an additional 10% tax if employee has not yet reached age 59 ½. Loans are not permitted. Rollovers are permitted from one IRA to another and to an eligible retirement plan. Contributions are immediately 100% vested. No annual filing requirement.


Kennerly Montgomery is a general practice law firm that has provided legal advice to clients for almost 100 years. KM attorneys practice in a variety of areas, representing municipal clients, including local governments, agencies and public utilities.

Bill Mason, Kathy Aslinger, Brittany Brent Smith and Ashley Trotto practice extensively in employee benefits law, which includes design, documentation, administration, audit, litigation, termination and qualification of employee health and welfare and pension plans for public, tax-exempt and private employers. The Firm sponsors various prototype retirement plans and prepares both interim amendments and discretionary amendments for all plan types as well as counsels with fiduciaries on ERISA and Federal & state law obligations. They represent clients before various agencies regulating employee benefits.

For more information about Retirement Plans, please contact us:
William E. Mason: wemason@kmfpc.com
Kathy D. Aslinger: kaslinger@kmfpc.com
Ashley N. Trotto: atrotto@kmfpc.com

©2014 Kennerly, Montgomery & Finley, P.C. This publication is intended for general information purposes only and does not constitute legal advice or a legal opinion and is not an adequate substitute for the advice of legal counsel. 

KENNERLY, MONTGOMERY & FINLEY, P.C.
550 MAIN STREET, FOURTH FLOOR | KNOXVILLE, TN 37902
P.O. BOX 442 | KNOXVILLE, TN 37901
PH (865) 546-7311 | FX (865) 524-1773 | WWW.KMFPC.COM

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