SECURE 2.0: Changes Affecting 403(b) Plans

Employee Benefits Alert

Client Alert


Enacted last December as part of omnibus appropriations legislation, the “Securing a Strong Retirement Act of 2022” (SECURE 2.0) includes a number of provisions that have an impact on retirement plan administration. In previous articles, we discussed key changes affecting retirement plans for 2023 and changes affecting defined benefit pension plans. This article highlights some of the most significant changes for 403(b) plans.

Changes Specific to 403(b) Plans

  • Collective Investment Trusts (CITs) and Separate Accounts - Unlike 401(k) plans, 403(b) plans with custodial accounts have not been able to maintain CITs or unregistered insurance company separate accounts, both of which can be more cost-efficient investment options than comparable mutual funds. SECURE 2.0 amends the Internal Revenue Code to allow 403(b) plans to hold these types of investments. However, 403(b) plans remain unable to maintain these investments due to limitations in existing securities law. Fortunately, the proposed Retirement Fairness for Charities and Educational Institutions Act of 2023, HR 3063 will remove this final roadblock if enacted. Thus, 403(b) plans with custodial accounts may soon finally be able to utilize CITs and unregistered insurance company separate accounts. Administrators and investment fiduciaries of 403(b) plans should monitor the legislation and be prepared to review investment lineups for potentially including these investment types should the legislation pass.
  • Hardship Distributions - Prior to 2018, hardship distributions from 401(k) plans and 403(b) plans could only be made from elective deferral contributions, excluding any earnings. In 2018, legislation was enacted to permit hardship distributions from earnings on elective deferral contributions and additional sources for 401(k) plans but not for 403(b) plans. SECURE 2.0 expands the hardship distribution sources for 403(b) plans to include earnings on elective deferral contributions, qualified nonelective contributions (including earnings), and qualified matching contributions (including earnings). This expansion applies for plan years beginning after December 31, 2023.
  • MEPs and PEPs - Before SECURE 2.0, 403(b) plans had not been permitted to operate as multiple employer plans (MEPs), including pooled employer plans (PEPs). These types of plans allow multiple employers to join together and operate a single plan for the general purpose of sharing administrative costs and administrative burden. SECURE 2.0 permits a 403(b) plan to be operated as a MEP, including a PEP, in plan years beginning after December 31, 2022.

Other Key Changes That Affect 403(b) Plans

  • Required Minimum Distributions (RMDs) - The act increases the age at which required minimum distributions begin – currently 72. For an individual who reaches age 72 after December 31, 2022, and age 73 before January 1, 2033, the RMD age is 73. For an individual who reaches age 74 after December 31, 2032, the RMD age is 75. Note this technically means that the RMD age is both 73 and 75 for anyone born in 1959 — an issue that will hopefully be addressed in later legislation. The act also liberalizes the application of the RMD rules to commercial annuities and significantly reduces the excise tax for the failure to take RMDs.
  • Roth Elections for Employer Contributions - Effective for contributions made after enactment of SECURE 2.0, 403(b) plans may allow participants to designate employer nonelective and/or matching contributions as Roth contributions. The designation is only permitted for contributions that are 100% vested when made.
  • Matching Contributions Based on Student Loan Repayments - Effective for plan years beginning after December 31, 2023, if the 403(b) plan permits, employer contributions made for “qualified student loan payments” are treated as matching contributions if certain requirements are met. Employers may rely on employee certification that the payment is for such a loan.
  • Mandatory Distributions- Effective for distributions made after December 31, 2023, the involuntary cash-out limit increases from $5,000 to $7,000.
  • Catch-Up Contributions- Effective for taxable years beginning after December 31, 2023, catch-up contributions for employees with compensation greater than $145,000 (as indexed) must be made on a Roth basis. Effective for taxable years beginning after December 31, 2024, participants ages 60 to 63 may make catch-up contributions up to the greater of (i) $10,000 or (ii) 150% of the regular catch-up amount (as indexed).
  • New Withdrawal Provisions - 403(b) plans may provide for certain withdrawals with respect to emergencies, domestic abuse, terminal illness, federally declared disasters, and payments for long-term care contracts. The requirements, tax treatment, and effective dates for the new withdrawal provisions vary.

If you have any questions about SECURE 2.0 and 403(b) plans, please contact one of the attorneys in the Employee Benefits and Executive Compensation Practice Group at Bradley.