A Time for Great Change for 403(b) Plans.

Recordkeepers are a good resource to help 403(b) plan sponsors navigate the changes brought on by the passage of SECURE 2.0.

The SECURE 2.0 Act of 2022 makes a number of changes to 403(b) plans, aiming to standardize the rules for 403(b)s and 401(k) plans and to give 403(b) plan sponsors and participants broader retirement saving help.

David Ashner, an Employee Retirement Income Security Act attorney with Groom Law Group, says that the “broad trend is to make the plans operate the same way and have the same rules.”

Sponsors of 403(b) plans include nonprofit 501(c)(3) organizations, public universities, K-12 public schools and churches—all tax-exempt entities. Unlike 401(k) plans, some 403(b) plans can avoid being governed by ERISA if they have little or no employer involvement, as dictated by the statute.

According to the 2022 PLANSPONSOR 403(b) survey of 25 recordkeeper respondents representing more than $1 billion in 403(b) assets, only 20% plans are ERISA plans and 80% are non-ERISA. A plan’s ERISA status could affect which SECURE 2.0 provisions apply to it, and taking up certain provisions of the legislation could affect a plan’s ERISA status.

The following changes will be made to 403(b) plans via SECURE 2.0:

• Auto-Enrollment and Auto-Escalation: Newly created 403(b) plans must enact the automatic enrollment and escalation features which were also prescribed for 401(k) plans in the original SECURE Act. They must start employee contributions at a rate between 3% and 10% and escalate 1% per year until they reach a range of 10% to 15%. Employees may opt out of either auto-enrollment or auto-escalation. These processes will operate the same for both plan types. Church and government plans, as well as small and new businesses, are exempt.
  
• PEPs and MEPs: 403(b) plans will be allowed to participate in Multiple Employer and Pooled Employer Plans. Ashner says this is designed to help smaller employers start plans by joining together to pool administrative costs.
  
• ‘De minimis’ incentives: SECURE 2.0 allows employers to offer “de minimis” incentives, such as low-dollar-amount gift cards, to contribute to a plan. This applies to all qualified retirement plans and “is on theme” of increasing participation, says Ashner.
  
• Standardization of Hardship Withdrawal Rules: Ashner explains that the original SECURE Act, passed in 2019, expanded reasons and rules for taking hardship withdrawals, but 403(b) plans were left out. SECURE 2.0 fixes that. Self-certification rules in SECURE 2.0 apply to both plan types also.

Government 403(b) plans, such as those for K-12 public schools, will never for any reason be ERISA plans. In addition, many states do not allow for deductions to be made from employees’ paychecks—either not at all or unless the employee gives permission. According to the National Association of Government Defined Contribution Administrators’ website, currently only nine states allow automatic enrollment in retirement plans, 16 allow some form of it and 25 states do not.

Church plans are non-ERISA plans unless they opt to be governed by ERISA.

But for 403(b) plan sponsors other than governments or churches, will adopting the provisions of SECURE 2.0 affect the plan’s ERISA status? Sponsors should consult with their plan adviser or recordkeeper.

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, have noted that, given the fact that SECURE 2.0 was passed at year-end 2022, there are limited provisions that could require plan-sponsor action in the near future (e.g., an increase in the required minimum distribution age and changes to deferrals to governmental 457(b) plans), as most provisions are not effective until 2024 at the earliest. However, there are some long-term action items, including a requirement that catch-up elections be made as Roth after-tax contributions for those making more than $145,000 per year (indexed) and a new ERISA 403(b) plan elective deferral eligibility provision for part-time employees, that may require significant time and effort to address, depending on plan design.

They suggest that plan sponsors consult with their retirement plan counsel, as well as their adviser, regarding the specific impacts of the legislation for their plans.

Recordkeepers can also be important partners for plan sponsors in navigating all the new requirements. A time of great change such as this might also be a good time for plan sponsors to assess the capabilities of their recordkeepers.—Rebecca Moore

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