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Key Differences Between 401(k) Plans and 401(b) Plans

Ben Renner

Ben Renner

employee benefits

financial wellness planning for retirement

Your employees might be confused when they walk into the office for the first time and are handed an employee benefits and compensation packet showing the various financial wellness options and benefits of a 401(b) retirement plan rather than the standard 401(k).

It’s understandable when employees aren’t fully aware of the various laws and regulations that affect different types of organizations differently.

The key difference between 401(k) plans and 401(b) plans is that 401(b)s are primarily used by nonprofit organizations, religious groups, and governmental organizations.

Because all of these kinds of organizations are taxed and regulated differently than your typical private enterprise, they can offer different retirement plans that are, subsequently, taxed and regulated differently.


A quick run-through the similarities of 401(k)s and 401(b)s: Like a typical 401(k), 401(b)s are tax-deferred retirement plans. This means employees can set aside pre-tax dollars from each paycheck for their retirement accounts. Usually, they can set aside up to $16,500 a year, but 401(b)s usually allow for higher limits in some cases. 401(b)s, like 401(k)s, are managed by a financial services company chosen by the organization, or one of several the employer gives its workers to choose from—always a plus for your employees. Employees then select mutual funds or annuities to invest their money.

Differences and What they Mean for Your Employee Compensation and Benefits Program

Because 401(b)s are only used by nonprofits and government organizations, the rules and regulations governing them are different from 401(k)s. These organizations are exempt from some administrative process (and therefore costs) normally applied to 401(k)s. With lowered administrative costs, 401(b)s allow smaller organizations with smaller budgets to provide their employees with retirement savings options.

Cost is the main difference between 401(k)s and 401(b)s. As always, costs depend on which company or companies handle your employee benefits and which options your employees choose.

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Another key distinction between retirement savings plans is elective deferral limits. Both plans usually have ‘catch-up’ contribution plans for employees over the age of 50, allowing them to contribute up to $22,000 instead of the standard $16,500. 401(b) plans, however, allow employees who have worked with the company for 15 years or more to contribute an extra $3,000 per year to their retirement plan, until they’ve added a total of $15,000 under this rule. 401(k) holders don’t have this ability.

Bottom Line

Of course, business executives and HR managers are all about the bottom line. For those managing retirement benefits for government workers or those in the nonprofit sector, offering employees a 401(b) retirement plan can make sense. The administrative costs of these plans are low relative to traditional 401(k)s, and they provide many of the same benefits and advantages that 401(k)s provide. Of course, there are always different options offering different things at different prices, and the prerequisite fine print that comes along with these plans. Make sure you decide well and give your employees as much leeway and power to make their own financial wellness decisions as possible.

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