The SECURE 2.0 Act is reshaping the retirement industry with sweeping reforms aimed at increasing savings, expanding access, and streamlining plan administration. 403(b) plans are, of course, not exempt from the new provisions, as automatic enrollment for employees at 3% of pay was taken into effect from January 1, 2025, onwards. When it comes to these plans, compliance isn’t always straightforward, as they come with unique structures and regulatory nuances.
As deadlines approach, plan sponsors and administrators must navigate a maze of updates, ensuring 403(b) plans are not only compliant with SECURE 2.0 but also participant-centric. Let’s dive in and see what else SECURE 2.0 has in store for 403(b) plans!
Long-term, Part-time Employee Eligibility
The SECURE 2.0 Act mandates that employees who work at least 500 hours per year for two consecutive years should be eligible to participate in employer-sponsored retirement plans, including 403(b) plans. This was brought into effect from January 1, 2025, marking a shift from the traditional “universal availability” rule, which allowed exclusions for certain groups such as student employees.
As per the new provisions, plan sponsors would have to start tracking the hours of long-term, part-time employees for prior years (2023 and 2024). Payroll systems could be synced with recordkeepers, so when an employee reaches 500 hours, they’d be notified of their eligibility.
Additionally, sponsors do not have to worry about including long-term, part-time employees in the employer match, as they are not included in Actual Deferral Percentage and Actual Contribution Percentage testing.
MEPs and PEPs
According to Section 106 of SECURE 2.0, 403(b) plans can participate in MEPS and PEPs, essentially granting them the ability to join larger retirement plans, while also maintaining relief via the “one bad apple” rule. This rule stipulates that violations made by one employer will not impact the tax treatment of employees from compliant employers.
PEPs also acknowledge that though they can relieve sponsors of some responsibilities, they are still not off the hook when it comes to administrative duties like checking payroll. And from an economies-of-scale standpoint, PEPs can help achieve pricing efficiencies as they are targeted to mid to small-sized 403(b) plans and employer-sponsored retirement plans.
Collective Investment Trusts (CITs) in 403(b)s
403(b) participants often do not have as many investment options as those with 401(k), 457(b), or the federal Thrift Savings Plan. In most 403(b) plans, investments could be made only in mutual funds or annuities, while others offered a variety of investment plans.
However, while mutual funds or ETFs are regulated by the Securities and Exchange Commission (SEC), CITs are regulated by the Office of the Comptroller of the Currency (OCC), exempting them from SEC regulations. Because of this, CITs usually have lower fees, administration, marketing, and distribution costs compared to mutual funds.
Back when the act was passed in December 2022, SECURE 2.0 tried to allow 403(b) plans to invest in CITs. While tax rules were changed to allow it, the necessary security laws did not make it to the final bill, rendering 403(b) plans unable to offer CITs as investment options until legal changes were made.
Industry veterans, however, believe that the bill might pass this year, finally allowing 403(b) plan participants to invest in CITs, knowing they come with benefits like greater investment choices and pricing flexibility.
Automatic Enrollment and Escalation
In compliance with new provisions of the SECURE 2.0 Act, new 403(b) plans are mandated to implement automatic enrollments from 2025 under the following conditions:
- Initial contribution rate: 3% to 10% of compensation
- Annual auto-escalation: 1% increase until reaching 10% to 15%
- Existing plans and small businesses with fewer than 10 employees are exempted
Wrapping Up
SECURE 2.0 brings transformative changes to 403(b) plans, but those provisions come with new compliance risks and operational challenges. But with Congruent Solutions’ expert advice and cutting-edge technology stack, plan sponsors can confidently navigate these challenges, delivering value and peace of mind for participants and administrators.
To learn more about how Congruent can help your organization manage 403(b) plan compliance under SECURE 2.0, get in touch with us today, and we will be happy to assist you!
