SECURE 2.0 Impact on 403(b) Plans

The SECURE 2.0 Act (the Act), includes numerous provisions intended to modernize the retirement system, encourage savings, and change the rules around U.S. retirement plans. Some provisions of the law are mandates, while others are optional changes or benefits that plan sponsors can choose to adopt. A few provisions from the Act that went into effect recently directly impact 403(b) plans, so sponsors of such plans should be aware of the changes and act accordingly.

Automatic Enrollment

For plan years beginning after December 31, 2024, new 403(b) plans are subject to mandatory auto-enrollment and auto-escalation requirements. The initial auto-enrollment amount must be at least 3%, but not more than 10%, unless the employee opts out. In subsequent years, that amount is increased by 1% until it reaches 10%, but not more than 15%.

LTPT Employees

Effective for plan years beginning after December 31, 2024, 403(b) plans must offer the plan’s salary deferral feature to long-term part-time (LTPT) employees who are at least age 21 and have two consecutive years of service where they completed at least 500 hours of service. 403(b) plans have traditionally had to comply with the “universal availability” rule but have been able to carve out eligibility for certain groups, such as excluding certain student employees from participating in the plan. With the new LTPT provision, it is important for 403(b) plan sponsors to start tracking the hours of LTPT employees for prior years, including 2023 and 2024. If these employees completed 500 hours in both 2023 and 2024, they are eligible to contribute to the 403(b) plan in 2025. Note that employees that fall under the LTPT rule do not have to be included in the employer match. In addition, these employees will not impact the plan’s nondiscrimination testing as they are not included in the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests.

MEPs and PEPs

SECURE 2.0 permits 403(b) plans to participate in multiple employer plans (MEPs) and pooled employer plans (PEPs). These are plans in which unrelated employers, who may or may not share a common business bond, may jointly participate. MEPs and PEPs give employers the opportunity to offload administrative responsibilities and also allow them to take advantage of economies of scale that such arrangements enjoy. Between MEPs and PEPs, PEPs are more geared toward small to mid-size 403(b) plans and employer-sponsored retirement plans, and they can relieve some plan sponsor obligations; however, they do not relieve all fiduciary responsibility. One thing that plans give up under a PEP is the ability to choose specific investment options because a PEP’s 3(38) investment fiduciary would do that work.

CITs

SECURE 2.0 initially created a provision that would allow 403(b) plans to invest in collective investment trusts (CITs), but additional legislation was still required to enact the provision. To provide some context, currently, 403(b) plan participants do not have the same access to certain investment options available to savers in other plans, including 401(k) plans and 457(b) plans. One such investment vehicle is the CIT. Unlike mutual funds or employee trust funds (ETFs), which must register with the Securities and Exchange Commission (SEC), CITs are regulated under the Office of the Comptroller of the Currency, a federal banking agency in the U.S. Treasury Department, and state banking regulators. Since CITs are exempt from SEC registration requirements, they typically have lower fees than mutual funds. In addition, CITs usually have lower administration, marketing, and distribution costs than retail products like mutual funds. Legislation that would allow 403(b) plans to include CITs as part of their investment menu options was reintroduced in February and is currently under consideration.

Please contact us if you have questions about the information outlined above; our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more on our Employee Benefit Plan services page.

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