On December 29, 2022 President Biden signed into law H.R. 2617, the Consolidated Appropriations Act, 2023, a $1.7 trillion omnibus spending bill that will keep the federal government funded for the 2023 fiscal year. Of the many provisions in the massive bill, Division T, the SECURE Act of 2022, contains close to 400 pages of far-reaching changes affecting retirement plans and IRAs. Commonly referred to as SECURE 2.0, it builds upon and adds to retirement plan provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0) which was passed in 2019, but is more extensive than the earlier law. This post focuses on five provisions of SECURE 2.0 that specifically impact retirement plans maintained by non-profit employers. In addition to the changes listed below, which affect plans currently in existence, beginning in 2025 newly adopted Section 403(b) plans will be required to auto-enroll participants, with some exceptions.
One: Expansion of Multiple Employer Plan and Pooled Employer Plan Arrangements to Section 403(b) Plans
Effective for plan years beginning after December 31, 2022, Section 403(b) plan sponsors can participate in multiple employer plan arrangements (MEPs) and pooled employer plan arrangements (PEPs), potentially achieving economies of scale under such arrangements (in terms of recordkeeping and investment expenses) that have previously only been available to for-profit employers. MEPs and PEPs organized for Section 403(b) plan sponsors will be able to take advantage of relief, extended under SECURE 1.0, from the “one bad apple” rule so that violation of one employer member of a multiple employer or pooled arrangement does not affect the tax treatment of other, compliant employer members.
Two: Section 403(b) Plans May Invest in Collective Investment Trusts (CITs)
Since 1974, the only two permitted investment vehicles for 403(b) plans were annuity contracts and mutual funds. Effective as of its date of enactment, SECURE 2.0 adds a third option, collective investment trusts (CITs), to that short list. CITs are pooled investment arrangements that are made available only to qualified retirement plans, and that share some features with mutual funds but have different regulatory oversight and may offer some cost efficiencies. Despite the immediate effective date, there will be some lead time before CITs are available to Section 403(b) plan sponsors due to the need to modify applicable securities laws.
Three: Expanded Investment Sources for Section 403(b) Hardship Withdrawals
Prior to SECURE 2.0, hardship withdrawals from Section 403(b) plans could be drawn only from employee contributions, less earnings. Effective for plan years after December 31, 2023, SECURE 2.0 will bring Section 403(b) plans into conformity with Section 401(k) plans in this regard, so that QNECs, QMACs , in addition to elective deferrals, and earnings on these amounts, are permitted sources for hardship withdrawals. SECURE 2.0 also permits hardship withdrawals to be made on the basis of a written certification by the participant as to the need for the withdrawal rather than on the basis of more formal documentation.
Four: Extension to Amend Section 457(b) Plans for SECURE 1.0 Required Minimum Distribution Rules
As we posted recently, December 31, 2022 was the deadline for sponsors of non-governmental Section 457(b) deferred compensation plans to amend their plan documents to incorporate changes to required minimum distribution rules under SECURE 1.0. For tax-exempt sponsors of these plans who did not act timely, SECURE 2.0 has extended the amendment deadline under SECURE 1.0 to conform to the amendment deadline under applicable provisions of SECURE 2.0. The new deadline is the last day of the first plan year beginning on or after January 1, 2025 (2027 in the case of governmental plans). Note in this regard that SECURE 2.0 further modifies RMD rules, including increasing the RMD starting age in stages, first from 72 to 73, then eventually to 75, so additional amendments to RMD provisions will eventually be needed under SECURE 2.0. Plans must operate in accordance with required provisions, in the interim.
Five: Eligibility for Long-Term, Part-Time Employees
This is a provision of SECURE 2.0 that is not unique to 403(b) plans but applies equally to 401(k) plans. The original SECURE 1.0 rule required long-term, part-time employees, defined as employees who have worked 500 or more hours of service in three consecutive twelve-month periods, to be able to participate in the deferral-only portion of a 401(k) plan beginning in 2024. Effective for plan years beginning after December 31, 2024, SECURE 2.0 expands this rule to 403(b) plans that are subject to ERISA and reduces the three consecutive twelve-month requirement to two consecutive periods. This will be a significant adjustment to 403(b) plan sponsors who are accustomed to the universal availability rule, one exception to which permitted employees who normally work less than 20 hours per week, and who fail to accumulate 1,000 hours of service in an eligibility measurement period, to be excluded from making elective deferrals. Although universal availability does not apply under 401(k) plans, the 1,000 hour rule operated in a similar way and will now yield to the 500 hour in two consecutive year standard.
SECURE 2.0 will be a topic of discussion at EforERISA in many posts to come. If you have not subscribed to this blog yet, please take a moment to do so by typing your email address under the prompt at “Continue Reading More Articles.” And if you are a plan sponsor, or advise plan sponsors, and have questions about provisions of the law or steps to take to get ready for their implementation, don’t hesitate to reach out using the Contact form (under “Posts Worth Revisiting”).
The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2023 Christine P. Roberts, all rights reserved.
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