Can a Nonprofit Have a 401(k)? Eligibility, Costs, and Compliance

Yes, a nonprofit can have a 401(k). Federal law has allowed any tax-exempt organization to sponsor one since January 1, 1997, and the plan works the same way it does at a for-profit employer: employees defer part of their pay into individual accounts, contributions grow tax-deferred, and the nonprofit decides whether to match.¹ The real questions are whether a 401(k) is the right choice compared to a 403(b), and whether your organization is prepared for the compliance work that comes with it.

Who Is Eligible

The Small Business Job Protection Act of 1996 lifted the previous ban on tax-exempt employers offering 401(k) plans. The Internal Revenue Code now permits “any organization exempt from tax” to include a 401(k) arrangement in its retirement plan.² That covers 501(c)(3) charities, social welfare organizations, trade associations, and every other flavor of exempt entity. Indian tribal governments are included. State and local governments are the group still locked out.

Size does not matter. A two-person animal rescue has the same legal authority to sponsor a 401(k) as a 500-employee hospital system. Many nonprofits default to a 403(b) out of habit, but the 401(k) is fully available and worth comparing before you commit.

401(k) or 403(b): Which One Fits

Since a 501(c)(3) can offer either plan, the differences drive the decision. Both share the 2026 employee deferral limit of $24,500.³ They diverge on three things that matter.

Universal availability. A 403(b) requires that if any employee can participate, essentially every employee must be offered the chance. It cannot exclude workers based on classifications like part-time, seasonal, or temporary status, though employees who normally work fewer than 20 hours per week can be left out.⁴ A 401(k) uses nondiscrimination testing instead and gives the sponsor more room to set eligibility criteria like a minimum service period.

ERISA exposure. A 403(b) funded only by employee salary deferrals, with no employer contributions, can qualify for an exemption from most ERISA requirements, including Form 5500 filing, fiduciary bonding, and plan audits.⁵ A 401(k) is always subject to ERISA regardless of how it is funded.

Plan design flexibility. A 401(k) generally gives you more control over eligibility rules, vesting schedules, and matching formulas.

The practical takeaway: if you want to offer salary deferrals with no employer match and the least paperwork possible, a 403(b) is often simpler. If you want to provide matching contributions and have more control over the design, a 401(k) usually fits better.

What It Costs, and What Credits Help

Administrative costs depend on plan size and provider. Most nonprofits hire a third-party administrator whose annual base fee typically runs from roughly $750 to $4,000, plus a per-participant charge from $15 to $100. Recordkeeping and investment custody charges are separate, though bundled providers may combine them into a single per-participant fee.

Plans with 100 or more participants who hold account balances at the start of the plan year must include an independent audit report with their Form 5500, prepared by a CPA. That audit typically costs between $8,000 and $20,000 depending on plan complexity.⁶

The SECURE 2.0 Act created tax credits that can offset startup costs, but read the fine print. Because 501(c)(3) organizations generally do not owe federal income tax, these credits are useful mainly to nonprofits that have unrelated business income tax liability. Organizations without UBIT liability cannot use the credits directly.

For eligible employers with 50 or fewer employees, the startup cost credit covers 100% of eligible administrative expenses, up to $5,000 per year for three years. Employers with 51 to 100 employees get 50% of those costs under the same cap.⁷ A separate credit reimburses actual employer contributions up to $1,000 per participating employee per year, covering 100% of contributions in years one and two for employers with 50 or fewer workers and dropping to 75% in year three. It applies only to contributions for employees who earned $100,000 or less the prior year.

Designing the Plan

Before any paperwork gets signed, the nonprofit needs to make several structural decisions that get recorded in the plan’s adoption agreement.⁸

Eligibility. Federal law lets you require employees to be at least 21 and to have completed one year of service before joining. You can set less restrictive thresholds but not more restrictive ones.⁹
Employer contributions. Whether to match, make nonelective contributions, or offer no employer money at all.
Vesting schedule. How long employees must work before they fully own any employer contributions.
Loans and hardship withdrawals. Whether participants can borrow or take early distributions.

You will need your Employer Identification Number and a qualified trustee or fiduciary to manage plan assets and oversee investment options.¹⁰ Most nonprofits work with a third-party administrator and recordkeeper rather than managing investments in-house.

One design decision worth flagging: any 401(k) plan established on or after December 29, 2022 must include automatic enrollment under SECURE 2.0. New participants get enrolled by default at a rate between 3% and 10% of pay, with automatic 1% annual increases until reaching at least 10% (capped at 15%). Employees can opt out. Employers that normally employ fewer than 11 people, organizations less than three years old, and churches are exempt. Adding auto-enrollment also qualifies you for an additional $500-per-year tax credit for three years.⁷

Adopting the Plan

Once the design is finalized, the board of directors must pass a formal resolution approving the adoption. The resolution authorizes the plan, sets an effective date, and typically appoints the trustee. The signed adoption agreement locks in the features chosen during the design phase.

After board approval, the organization must give every eligible employee a summary plan description explaining how the plan works, when they can participate, what contribution options exist, and how to file a benefits claim. Federal law requires plan administrators to deliver this document at no cost to participants.¹¹

The final mechanical step is payroll integration. Employee deferrals must be deposited into the plan trust as soon as they can reasonably be separated from the organization’s general funds. Plans with fewer than 100 participants have a seven-business-day safe harbor. The outer statutory limit is the 15th business day of the following month, but the Department of Labor expects employers who can deposit faster to do so.¹²

Ongoing Compliance

A 401(k) is not a set-it-and-forget-it benefit. Three obligations recur every year.

Form 5500

Every 401(k) subject to ERISA must file Form 5500 with the Department of Labor annually, reporting the plan’s financial condition, investments, and operations. Late or incomplete filings carry a civil penalty of up to $2,739 per day.⁶

Nondiscrimination Testing

Unless the plan uses a safe harbor design, the IRS requires annual testing to confirm that highly compensated employees are not benefiting disproportionately. For 2026, any employee who earned more than $160,000 in the prior year, or who owns more than 5% of the organization, is classified as highly compensated.¹³ The tests compare deferral and contribution rates between that group and everyone else.¹⁴

When testing fails, the plan must correct the imbalance, usually by refunding excess contributions to highly compensated employees or making additional contributions for everyone else. This is where nonprofits get burned. An executive director earning $180,000 who maxed out their deferrals may have to receive a partial refund in March because participation among lower-paid staff was too thin.

Fiduciary Duties

ERISA requires plan fiduciaries to act solely in the interest of participants and to exercise prudence in managing assets and selecting investments.¹⁰ The board or a designated plan committee must periodically review fund performance, benchmark administrative fees, and document its decision-making. Outsourcing day-to-day administration does not eliminate that oversight responsibility.

Safe Harbor: The Testing Escape Hatch

Safe harbor plans are worth understanding because they solve the nondiscrimination testing problem entirely. In exchange for committing to a specific employer contribution formula and immediate vesting, the plan automatically passes the tests that trip up so many organizations.

Three standard formulas qualify:

Basic match: 100% on the first 3% of pay the employee defers, plus 50% on the next 2%.
Enhanced match: a more generous formula, such as 100% on the first 4% of pay, that must be at least as generous as the basic match at every tier.
Nonelective contribution: the employer contributes 3% of pay for all eligible employees, whether or not they defer anything themselves.

All three require immediate 100% vesting, so employees own the employer contributions from day one. For a nonprofit with a relatively flat pay structure, safe harbor may be unnecessary overhead. For an organization where senior leadership earns significantly more than program staff, it is often the only realistic way to let those leaders maximize their own deferrals without year-end refunds.

1
GovInfo. Statement on Signing the Small Business Job Protection Act of 1996
2
Office of the Law Revision Counsel. 26 U.S. Code 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
3
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
4
Internal Revenue Service. Issue Snapshot – 403(b) Plan – The Universal Availability Requirement
5
Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans
6
Department of Labor. 2025 Instructions for Form 5500 Annual Return/Report of Employee Benefit Plan
7
Internal Revenue Service. Retirement Plans Startup Costs Tax Credit
8
Internal Revenue Service. Preapproved Retirement Plans Adopting Employer
9
Internal Revenue Service. 401(k) Plan Qualification Requirements
10
Office of the Law Revision Counsel. 29 U.S.C. 1104 – Fiduciary Duties
11
U.S. Department of Labor. Plan Information
12
U.S. Department of Labor. ERISA Fiduciary Advisor – What Are the Fiduciary Responsibilities Regarding Employee Contributions?
13
IRS.gov. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Cost-of-Living
14
eCFR. 26 CFR 1.401(a)(4)-1 – Nondiscrimination Requirements of Section 401(a)(4)