How SECURE 2.0 Impacts 403(b) Plans

Bricker Graydon LLP

Bricker Graydon LLP

While many provisions of SECURE 2.0 apply to various types of retirement plans, including 403(b) plans, this update will focus on those provisions of the Act that apply only to 403(b) plans. Please check out our prior blog posts for other SECURE 2.0 provisions that impact 403(b) plans as well as other types of retirement plans.

Effective for plan years beginning on or after January 1, 2023, 403(b) plans (other than church plans) may now participate in multiple employer plans (MEP) and pooled employer plans (PEP). MEPS and PEPs allow unrelated employers to participate in one plan, while retaining some flexibility with plan provisions to tailor the plan to each employer’s needs. They are seen as a cost-effective way to offer a retirement plan while reducing administrative burdens and delegating much of the employer’s fiduciary risk. The Act also includes relief from the “one bad apple” rule so that the violations of one employer do not affect the tax treatment of employees of compliant employers. A handful of service providers are now offering PEPs for 403(b) plans.

The second change deals with optional hardship withdrawal provisions which will be effective for plan years beginning on or after January 1, 2024. If desired, plan sponsors will be able to amend their 403(b) plans to allow hardship withdrawals to be made from non-elective and matching contribution sources. This will be in addition to elective deferral amounts which were the only distribution source under prior guidance. The Act also provides that 403(b) plan sponsors may now (as of the Act’s effective date in December 2022) accept a written declaration from a participant self-certifying that the hardship withdrawal request is:

  • on account of a financial need of a type deemed to be an immediate and heavy financial need
  • not in excess of the amount required to satisfy the need

Finally, SECURE 2.0 would permit 403(b) plans to invest in common investment trusts (CIT). Under current law, 403(b) plan investments are generally limited to annuity contracts and publicly traded mutual funds. Available in 401(k) and other 401(a) plans, CITs can be a cost-effective investment alternative for participants. Unfortunately, the provision has little immediate practical impact because securities law still prohibit the investment for 403(b) plans. Until such time as the related securities laws are likewise changed, CITs remain unavailable to 403(b) plans.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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