Viewing SECURE 2.0 through a 403(b) lens 

May 22, 2023

In recent years, Internal Revenue Code (IRC) Section 403(b) plans have evolved to become more like 401(k) plans. The SECURE 2.0 Act of 2022 (Div. T. of Pub. L. No. 117-328) continues this trend by making a handful of changes specifically for 403(b) plans. Several provisions build on earlier reforms under the Setting Every Community Up for Retirement Enhancement Act of 2019 (Div. O of Pub. L. No. 116–94) (SECURE 1.0). Other SECURE 2.0 changes for defined contribution (DC) plans in general also apply to 403(b) plans. This article gives a high-level overview of the SECURE 2.0 provisions affecting 403(b) plans and their sponsors.

Starting in plan years beginning after 2024, Section 403(b) plans must allow part-time workers to participate after they have completed two consecutive 12-month periods with at least 500 hours of service. Section 403(b) plans can disregard service before 2023 for determining eligibility and vesting. IRS officials have recently indicated that the agency expects to issue related guidance in the near future.

Section 403(b) plans weren’t subject to SECURE 1.0’s requirement that 401(k) plans allow part-time workers to participate after completing three consecutive 12-month periods with at least 500 hours of service. SECURE 2.0 extends the long-term, part-time worker participation rules to 403(b) plans and shortens the service period to two consecutive 12-month periods.

SECURE 2.0 allows Section 403(b) plans (other than church plans) to join MEPs, including pooled employer plans (PEPs). MEPs and PEPs enable employers to band together to reduce the costs and burdens of offering a workplace retirement plan. To join a MEP, employers generally must have a common business nexus other than offering retirement benefits to their employees. However, SECURE 1.0 made an exception for PEPs, which can have completely unrelated participating employers.

PEPs, in particular, have the potential to reduce the costs and fiduciary risks of offering a retirement plan. A PEP’s administrator — known as a pooled plan provider — is responsible for performing most administrative and fiduciary functions for the plan, including (but not limited to) filing one Form 5500 for the entire PEP, performing nondiscrimination testing, and satisfying applicable notice and disclosure requirements under the IRC and ERISA. Employers that join a PEP retain fiduciary responsibility for selecting and monitoring the pooled plan provider and any other fiduciaries the employer appoints.

SECURE 1.0 first authorized PEPs for plan years beginning after 2020 but limited participation to tax-qualified plans under IRC Section 401(a). For plan years beginning after 2022, SECURE 2.0 extends the PEP rules on similar terms to 403(b) plans. Although originally intended to help small employers offer retirement plans, PEPs are open to employers of any size.

SECURE 2.0 amended the IRC to allow 403(b) plan custodial accounts to invest in CITs, a type of pooled investment vehicle already used by many 401(k) plans. CITs are similar to mutual funds but have some notable differences that can make CITs a more cost-effective investment option. For example, CITs are generally exempt from the securities-law registration requirements applicable to mutual funds and limit participation to certain kinds of tax-exempt retirement plan investors.

Notwithstanding SECURE 2.0’s changes to the IRC, federal securities laws still prevent 403(b) plans from investing in CITs. However, Congress is currently considering a bill (HR 3063) that would amend securities laws to let 403(b) plans offer these investments.

In plan years beginning after 2023, qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs), earnings on those contributions, and earnings on elective deferrals can be sources for hardship withdrawals from 403(b) custodial accounts. Hardship withdrawals from 401(k) plans can already be made from these sources. Although 403(b) plans have generally followed the 401(k) rules for hardship withdrawals, these statutory updates fully align the rules for both types of plans.

Many other SECURE 2.0 provisions apply to 403(b) and other DC plans. While a detailed overview of these provisions is beyond the scope of this article, the following provisions are already in effect:

• The age that triggers required minimum distributions (RMDs) has increased from 72 to 73 and will increase again to 75 in 2033.
• Employees have new distribution options with no early withdrawal penalty for natural disasters and terminal illness. In addition, corrections and forensic security officers working for governmental employers as well as private-sector firefighters can take distributions at age 50 with no early withdrawal penalty.
• Plans can now rely on an employee’s self-certification of eligibility for hardship distributions.
• Employers can now give employees the option to receive matching and nonelective contributions on a Roth basis.
• Section 403(b) plan sponsors may want to pay special attention to the following provisions that take effect next year, though agency guidance is still needed for implementation:
• Sponsors can match employees’ qualified student loan payments as if the payments were the employee’s own pretax, Roth or after-tax contributions.
• Certain highly paid employees will be limited to making catch-up contributions on a Roth basis.
• Plans can allow nonhighly compensated employees to have Roth-based emergency savings accounts linked to their retirement plan accounts.
• Employees will have new distributions options with no early withdrawal penalty for personal emergencies and domestic abuse. Penalty-free distributions for payment of long-term care premiums will take effect in 2025.

For information about these and other SECURE 2.0 provisions affecting DC plans, see Mercer’s User’s guide to SECURE 2.0 (March 7, 2023).

• Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2023)
• Division O of Pub. L. No. 116-94, the SECURE Act (Congress, Dec. 20, 2019)

• House bill would let 403(b) plans invest in collective investment trusts (May 16, 2023)
• DC plans need guidance on SECURE 2.0’s higher catch-up limit (May 1, 2023)
• Implementing SECURE 2.0’s Roth provisions may tax DC plan sponsors (April 11, 2023)
• Taking a closer look at SECURE 2.0’s penalty-free distribution provisions (March 13, 2023)
• User’s guide to SECURE 2.0 (March 7, 2023)
• Road-testing SECURE 2.0’s auto-enrollment mandate for new DC plans (Feb. 14, 2023)
• SECURE 2.0 brings more changes to required minimum distribution rules (Feb. 7, 2023)
• SECURE 2.0 retirement reforms set to become law (Dec. 20, 2022)
• IRS rights the apple cart for multiple-employer plans (April 6, 2022)
• DOL finalizes pooled plan provider registration requirements (Nov. 20, 2020)
• IRS finalizes hardship distribution rules (Sept. 25, 2019)

• SECURE 2.0: where to focus and where to begin (March 20, 2023)