403(b) Plans Have Special Considerations When Complying with SECURE 2.0

As more provisions from the SECURE 2.0 Act of 2022 go into effect, 403(b) plan sponsors face new challenges implementing plan design and administrative changes.

Speakers during Wednesday’s PLANSPONSOR Roadmap Livestream session, “Special Considerations for 403(b) Plans,” discussed how new rules for long-term, part-time employees, the formation of multiple and pooled employer plans, and the likelihood 403(b) plan sponsors will have the option, in the future, of using collective investment trusts.   

Long-Term, Part-Time Rules

David Levine, principal in and chair of Groom Law Group, explained that SECURE 2.0 created a provision that allows employees who work at least 500 hours per year for more than two years to become eligible to participate in an employer-sponsored retirement plan, which includes 403(b) plans.

For several years, 403(b) plans have had to comply with the “universal availability” rule, but Levine said these plans have been able to carve out eligibility for certain groups, such as excluding certain student employees from participating in the plan.

This new provision went into effect on January 1, and Sam Moroni, a senior wealth strategy associate at UBS Financial Services, said it is important for 403(b) plan sponsors to start tracking the hours of long-term, part-time employee for prior years, including 2023 and 2024. He says if these employees completed 500 hours in both 2023 and 2024, they are now eligible to contribute to the 403(b) plan this year.

“What [403(b) plan sponsors] should have already done—or what [they] really want to think about doing going forward—is working with [the] payroll team … to make sure that there’s a process in place to track the hours of those impacted employees,” Moroni said. “You also want to make sure that your payroll provider or system is synced up with your recordkeeper so when that employee reaches 500 hours … you know that that employee is eligible, and you’re providing them with the opportunity to make a deferral election within your employer-sponsored 403(b) plan.”

Moroni added that 403(b) sponsors also need to consider employees who have been excluded in previous years. If an employee works 10 hours per week over a 50-week period, that is 500 hours, so they will be eligible for the plan. Moroni said this may not apply to students.

In addition, employees that fall under the long-term, part-time rule do not have to be included in the employer match, Moroni explained. Plan sponsors also do not need to worry about how including these employees in the plan will impact discrimination testing, as these employees are not included in Actual Deferral Percentage and Actual Contribution Percentage testing.

“The good news is you don’t have to provide these employees an employer match, but what you may want to do is take a look at your employee group and really get a feel of how many of these employees are going to meet this long-term, part-time classification and become eligible for the retirement plan, and [then ask:] ‘What is the potential financial impact if we were to offer these employees an employer match?’” Moroni said.

He said if a company is grooming employees to become full-time, it may want to consider offering an employer match to encourage them to stick around.

MEPs and PEPs

Speakers on the livestream also discussed Section 106 of SECURE 2.0, which allows 403(b) plans to participate in multiple employer plans and pooled employer plans. This essentially grants 403(b) plans the ability to join larger retirement plans while also maintaining relief via the “one bad apple” rule, which means violations by one employer will not affect the tax treatment of employees from compliant employers.

Levine said PEPs can be a good option for offering retirement benefits, but they tend to be marketed as a way to relieve all of a fiduciary’s obligations, which is not necessarily true.

“PEPs can take a lot off your plate,” Levine said. “Sometimes their marketing is relieving you of every obligation you could have with respect to a plan. That’s usually not true. The answer is”: PEPs are in the middle. Sometimes they can relieve a lot of responsibility, but you may still have some responsibility that sticks with you. … Each PEP is unique and different.”

He said it is important to understand that PEPs are not a “cure all,” because even though the plan is outsourcing its recordkeeping and other services, the plan sponsor still may have responsibilities.

Moroni said the plan sponsor would still be on the hook for certain administrative procedures like checking payroll. He said one thing 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.

“From an economies-of-scale standpoint, in terms of obtaining certain pricing efficiencies, PEPs are really geared toward more of those mid to small-size 403(b) plans and employer-sponsored retirement plans,” Moroni said.

CITs in 403(b)s

Levine also gave an update on the status of 403(b) plans having access to collective investment trusts in their investment lineups. Many 401(k) plans currently invest using CITs, which typically have lower costs when compared with mutual funds. SECURE 2.0 created a provision that would allow 403(b) plans to invest in CITs, but additional legislation is still required to enact that provision.

New bills have been introduced in the House of Representatives and the Senate to allow 403(b)s access to CITs, and a hearing was held last week by the U.S. House Committee on Financial Services to review the proposals. The committee has requested feedback on several legislative proposals to increase investor access to private markets, including the CITs in 403(b)s proposal.

“I think there’s widespread agreement people would like it to pass, but because of the contours of exactly how it works … it keeps getting held up,” Levine said. “So maybe it’ll pass this year, but there’s a real chance it won’t. … There are a number of Democrats that are not in favor of 403(b)s having [access to] CITs. … The long and short of this at this very moment is: You can’t do it, but there are real benefits, and hopefully we will achieve it soon.”

A full recording of the webinar can be viewed here.