The same law that beefed up the minimum wage giving hamburger flippers a 50-cents-per-hour raise last month will soon allow not-for-profit hospitals to offer the same retirement plans as their for-profit cousins.
Buried inside the Small Business Job Protection Act is a provision that will allow not-for-profits to implement the savings programs called 401(k) plans, after the section in the Internal Revenue Service code that created them. The new law could be especially useful for acquisition-minded healthcare organizations.
Beginning Jan. 1, not-for-profits will be able to choose between traditional 403(b) savings plans, which most have had for years, and 401(k) plans, which have increasingly captured America's savings fancy.
Both types of plans allow employees to reduce their taxable salaries by putting away up to $9,500 annually to earn tax-deferred money until withdrawal. And under either plan, employers can match a portion of workers' contributions.
Both kinds of savings plans also can ease employers' burdens by substituting defined contribution plans for the employer-financed benefits of traditional pension plans. Defined contribution plans make it easier for employees to save for retirement and shift the primary responsibility for retirement funding to them. The popularity of these savings plans often allows employers to reduce reliance on traditional pensions that are typically funded completely by employers.
By law, 401(k) plans can include investment options that are off limits to 403(b) plans, which feature only qualified mutual funds and annuities. The 401(k)-only options include self-directed brokerage accounts, individual stocks and privately managed investment accounts that can have lower expenses than mutual funds.
Whether many not-for-profits will take the 401(k) plunge remains unclear, experts say. Neither plan has benefits that offer a hands-down advantage over the other.
But for hospitals considering acquisitions or mergers, adding a 401(k) plan may be important in appealing to physician groups or employees of for-profit companies.
"It's no longer just a benefits or human resources decision," said Thomas Bienek, senior vice president at Fidelity Investments, the country's largest 401(k) administrator and third-largest 403(b) administrator. "You really need to look at a 401(k) plan as an option in the overall benefits and compensation plan," Bienek said.
Because the choice of plans needs to jibe with a larger business strategy, top healthcare executives-including chief financial officers-need to be involved, he added.
Executives will have to weigh whether the business advantages of sponsoring a 401(k) plan outweigh the headaches. Generally, 401(k) plans offer a broader array of investment options and enjoy greater recognition among employees.
Participation in a 401(k) retirement plan has taken a spot next to motherhood and apple pie as a symbol of virtue as many Americans' faith in the future of Social Security has waned.
About 22.3 million participants have socked away $675 billion in 401(k) plans, according to Access Research, a Windsor, Conn.-based consulting firm. That compares with 4.6 million employees who hold $330 billion in assets in 403(b) plans. About 1.6 million state and local government employees participate in a third type of retirement plan known as a 457, with nearly $55 billion in assets (See chart, p. 39).
But despite the popularity of 401(k) plans, not-for-profits without acquisitions or mergers on the drawing board would be best advised to stand pat.
"There's no compelling reason for a non-profit to rush to the exits" on its 403(b) plan, said Cherith Harrison, vice president with Diversified Investment Advisers, a consulting firm based in Purchase, N.Y.
The 403(b) plans have some attractive advantages. For instance, 403(b) plans can be easier to administer and also can allow some workers to shelter more income from taxes. Under a 403(b) plan, employees with 15 or more years of service can boost savings by $3,000 above the usual limit to make up for years when they contributed less than the permitted maximum. That's not allowed in a 401(k) plan.
"A 401(k) isn't a magic bullet," Harrison said. Besides, many not-for-profits seem to take pride in the exclusivity of their 403(b) plans: "It's their own special plan" that for-profits can't offer, she said.
But increased investment options alone may lead hospitals with 403(b) plans to at least kick the tires on a 401(k). "All things considered, a 401(k) is a better mousetrap because of the investment flexibility," said Ronald L. Bush, senior vice president at Access Research.
Under current law, though, assets in a 403(b) plan can't be transferred or mixed with those in a 401(k). So hospitals and healthcare systems that elect to use a 401(k) beginning next year would have to keep their 403(b) plans up and running.
"It would seem unwise for someone to freeze or terminate a 403(b) plan just to start up a 401(k) plan," Bush said.
The 401(k) plans have some definite administrative drawbacks compared with 403(b) plans. For example, strict discrimination testing to ensure that highly compensated workers aren't benefiting disproportionately can be costly for the plan sponsor and reduce tax-sheltering benefits for the highest-paid employees. A lot of paperwork also is needed to document the 401(k) plans. Both requirements are part of the Employee Retirement Income Security Act, which applies to all 401(k) plans.
Only half of 403(b) plans are subject to ERISA, depending on whether the not-for-profit sponsor elects to play by those rules. For example, ERISA isn't triggered if a plan sponsor selects vendors, doesn't match contributions and tells the employees they're on their own. If a hospital takes a hands-off approach, a 403(b) plan can be run without ERISA scrutiny.
But there are instances where running dual plans makes sense.
For example, some hybrid healthcare systems that feature both for-profit and not-for-profit units already have experience running side-by-side savings plans.
Minneapolis-based Allina Health System, for example, offers a 401(k) to employees of its for-profit HMO and certain employee groups, such as ambulance drivers and equipment service technicians. They account for less than 10% of all employees. The others are covered by the 403(b).
Even though 20,000-employee Allina could adopt a 401(k) as its primary plan next year, it has no plans to do so.
"We'll keep our 403(b) plan because it allows people to put away more toward retirement under special circumstances," said Kent A. Davidson, Allina's benefits director.
"It's more complex and a little more expensive," he added, "but I think it's worth it to the employee."