March 9, 2010 — Massachusetts nonprofits with 100 or more employees eligible to participate in 403(b) retirement must implement stricter administrative practices or face possible fines of up to $50,000 under a new federal law regulating nonprofit retirement plans.

Under a federal law passed last year, Massachusetts private schools, colleges, universities, and 501(c)(3) organizations must file a written documents each year that outlines their 403(b) plans. They must also file Form 5500 with the U.S. Department of Labor by July 31 each year. Plans with more than 100 eligible participants are required to have an annual independent audit.

“Employers who manage these plans need to be on alert,” said Jay Kessler, partner at Samet & Company PC. “In addition, boards of trustees who oversee these organizations bear responsibility for oversight of the new regulations governing their 403 (b) plans.”

Similar to 401(k) plans, 403(b) plans allow employees of nonprofit organizations to defer federal and state taxes on a portion of their salary by investing them for retirement. They then pay income tax on those funds when they are distributing. The new law is an effort to bring regulations on 403(b) plans more in line with those that govern 401(k) plans.

“Because of the additional administrative responsibility being placed on the non profit organizations, they need to be more involved than ever before to ensure compliance,” Kessler said. “Boards of trustees need to monitor the process by setting up a separate committee to oversee the compliance process.”

He noted that the audit will help nonprofits manage the contributions, investments, and distribution processes of 403(b) plans and aid in filing complete, accurate annual reports and tax returns each year.

Nonprofits that are exempt from the new regulations include churches and government entities.

Kessler said the new law provides harsh penalties for noncompliance: if a nonprofit organization fails to file the IRS Form 5500 every July 31, it could face penalties of $1,000 per day, up to $50,000. In addition, the nonprofit retirement plan could lose its, effectively costing precious retirement savings for its employees and retired participants.