By Linda J. Kramer, CPA, MBA

SECURE 2.0 impact on nonprofits extends to 403(b) and 401(k) plans

Significant changes to workplace retirement plans were enacted in the waning days of 2022 as the SECURE Act of 2022 – also known as “SECURE 2.0” – was signed into law.

A sequel to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, SECURE 2.0 is designed to further expand access and boost participation in retirement saving plans among all employers. The Act features dozens of provisions that take effect over the next decade, including several that will impact nonprofit organizations.

How SECURE 2.0 may affect you

Following are some of the key provisions of SECURE 2.0 that nonprofit 403(b) plan sponsors should be aware of:

• Auto-Enrollment and Auto-Escalation: Under SECURE 2.0, newly created 403(b) plans must include the automatic enrollment and escalation features which were also required of 401(k) plans in the original SECURE Act. Employees must affirmatively opt out of the plan if they don’t want to contribute. If they don’t opt out and don’t select a specific contribution level, the sponsor must enroll them and start contributions at a rate between 3% and 10%, which escalates 1% per year until they fall within a range of 10% to 15%. Organizations with fewer than 10 employees, as well as church and government plans, are exempt.
  This provision is effective starting January 1, 2025.
• Expansion of Multiple Employer Plan and Pooled Employer Plan Arrangements to Section 403(b) Plans – 403(b) plan sponsors now may participate in multiple employer plan arrangements (MEPs) and pooled employer plan arrangements (PEPs), potentially reducing costs in terms of recordkeeping and investment expenses. Previously, MEPs and PEPs have been available only to for-profit employers. 
  This provision is effective for plan years beginning after December 31, 2022.
• Section 403(b) Plans May Invest in Collective Investment Trusts (CITs) – Since 1974, by law 403(b) plans have been allowed to invest in only two investment vehicles – annuity contracts and mutual funds. 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.
  This provision is effective as of the date of enactment, but 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.
• 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. SECURE 2.0 will bring Section 403(b) plans into conformity with Section 401(k) plans in this regard, so elective deferrals, and earnings on these amounts, as well as special contributions employers can make to correct certain compliance errors, are permitted sources for hardship withdrawals. SECURE 2.0 also allows hardship withdrawals to be made upon written certification by the participant as to the need for the withdrawal rather than requiring more formal documentation.
  This provision is effective for plan years beginning after December 31, 2023.
• Eligibility for Long-Term, Part-Time Employees – The original SECURE Act required long-term, part-time employees, defined as employees who have worked 500 or more hours in each of three consecutive twelve-month periods, to be able to participate in the deferral-only portion of a 401(k) plan beginning in 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 provision is effective for plan years beginning after December 31, 2024.

Provisions affecting both 403(b) and 401(k) plans

The following provisions of SECURE 2.0 apply to both 403(b) plans and 401(k) plans, and are already in effect:

• Increase in age for first Required Minimum Distributions (RMDs) – The SECURE 2.0 Act increases the age at which retirement savers must start taking RMDs to 73, effective January 1, 2023. Under the law, the RMD age will advance to 75, effective January 1, 2033.
• Employers allowed to provide small financial incentives for contributing to a plan – Employers may offer incentives such as low-dollar gift cards, as long as they are not paid for with plan assets. Effective after December 29, 2022.
• Roth treatment of employer matching or nonelective contributions – This provision enables employers to give employees the option of receiving matching and qualified nonelective contributions on a Roth basis. Effective after December 29, 2022.
• Reduction in penalties for failure to take RMDs – Penalties are reduced from 50% to 25%, with a further reduction to 10% if the RMD failure is corrected in a timely manner. Effective after December 29, 2022.
• Changes to Employee Plans Compliance Resolution System – This provision significantly expands the ways that plan sponsors and custodians can correct operational failures in their plans without seeking approval from the IRS or the U.S. Department of Labor (DOL). Effective after December 29, 2022.

We will keep you informed with future articles on how the SECURE 2.0 impact on nonprofits may affect your organization. If you have questions about how your organization’s plan may be affected, please contact your GT Reilly advisor.