Secure Act 2.0 and 403(b) Plans

With Secure Act 2.0 passing just before the holidays, I know a lot of nonprofit plan sponsors are not yet up to date on what’s the in the Act and how it impacts their plans.?There’s a lot to unpack in this legislation and there’s very significant changes that are impacting 403(b) plans.?I’ll attempt to summarize some of the bigger impacts today as we continue to analyze this new legislation.?Let’s start in the beginning of the new legislation!

Section 101 requires new 401(k) and 403(b) plans to automatically enroll employees upon becoming eligible at an initial deferral rate of no less than 3% but not more than 10%.?Employees can opt out of automatic enrollment if they choose to.?In each subsequent year after being initially enrolled, participants’ deferral amounts will increase by 1% until total the total deferral rate is at least 10% but not higher than 15%.?This is effective for NEW plans beginning after December 31, 2024, with some exceptions.?The exceptions are church plans, governmental plans, businesses with fewer than 10 employees and businesses that have only been around for less than 3 years.?The data for the impact of automatic enrollment (coming mostly from 401(k) plans) has shown a dramatic difference in overall account balances for participants at retirement versus plans that don’t adopt automatic enrollment.?The goal with Section 101 is to improve retirement savings for as much of the workforce as possible.?

Section 106 allows 403(b) plans to participate in Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs).?This provides another solution for smaller nonprofit organizations to band together to obtain more favorable plan pricing, investments and services.?This section also addresses the notorious “bad apple” rule, so that compliance violations of one organization within the MEP or PEP do not negatively affect the treatment of the rest of the organizations in the plan.?This was historically a big concern for the operation of MEPs and PEPs.?Section 106 is effective for plan years beginning after December 31, 2022.?

Section 109 increases the catch-up contribution limit to $10,000 for individuals who have attained the ages of 60, 61, 62 and 63.?This is a 50% increase from current catch-up limits.?This is effective for tax years beginning after December 31, 2024.?This is a great thing for older employees who may be behind on their retirement savings goals.

Section 110 is intended to assist employees who may not be able to save for retirement because of overwhelming student loan debt.?This section would allow an employer to make a matching contribution in the 403(b) plan towards “qualified student loan repayments.”?There are a lot of questions on how to make this section administratively feasible for organizations, so I’m sure there will be more guidance from the DOL on how to implement this section successfully.?This section is effective for plan years beginning after December 31, 2023 and is optional for plan sponsors to adopt.

Section 128 expands the types of investments available to 403(b) plans, FINALLY!?Previously, 403(b) plan investment types were limited to annuity contracts and mutual funds.?Under this new legislation, Collective Investment Trusts (CITs) will now be allowed to be used in 403(b) plans.?This is huge as far as expanding Stable Value access (an alternative to fixed accounts and money market funds) as well as managed portfolios such as target date funds.?This section is effective after date of enactment for Secure Act 2.0.

Section 602 changes the rules for hardship distributions for 403(b) plans so that they match 401(k) plan rules.?Effective for plan years beginning after December 31, 2023, participants can take a hardship distribution on both employee deferrals and employer contributions, rather than being limited to employee deferrals only.

Section 604 will permit employers to make employer matching contributions on a Roth basis if they choose rather than being limited to pre-tax only.?This is effective on the date of enactment of Secure Act 2.0.

I want to emphasize that these are just some of the highlights of Secure Act 2.0.?This is a very long piece of legislation and there are many more impacts to 403(b) plans and retirement plans as whole.?As I’ve highlighted above, there are many positive impacts to 403(b) plans and their participants.?As we continue to analyze the impacts, I will put out more detailed newsletters on how this affects nonprofit plan sponsors.?In the meantime, please feel free to reach out to me with any questions or if I can be of a resource to you.?Thanks for following! ??

About Strategic Retirement Partners?

Strategic Retirement Partners is a nationwide independent retirement plan consulting services firm dedicated to providing guidance in decision-making and problem solving to employers and sponsors of retirement plans. With 23 offices from coast to coast, Strategic Retirement Partners currently consults on over 975 corporate and non-profit plans and over $16.8 billion in assets as of January 1, 2022.?

Securities offered through LPL Financial, Member FINRA/SIPC. For hyperlinks to FINRA and SIPC, please refer to ‘See Contact Info’ section in my Linked In profile. Investment advisory services are offered through Global Retirement Partners, an SEC Registered Investment Advisor. Global Retirement Partners and Strategic Retirement Partners (SRP) are separate entities from LPL Financial.