What Does SECURE 2.0 Mean For 403(b) Plans?

Experts weigh in on how SECURE 2.0 may make 403(b) plans operate more like 401(k)s, including being able to participate in PEPs.

Updated with clarification

The SECURE 2.0 Act makes a number of changes to 403(b) plans, aiming to standardize them with 401(k) plans to give 403(b) plan sponsors and participants broader retirement saving options.  

SECURE 2.0, which has been passed by Congress and is awaiting signature from President Joe Biden, was designed to expand retirement saving across the country, including giving public 403(b) plan sponsors, such as local governments and ,schools access to many of the benefits allowed in private industry 401(k) plans, while abiding by similar regulations.

David Ashner, an Employee Retirement Income Security Act attorney with Groom Law Group, says that the “broad trend is to make the plans operate the same way and have the same rules.”

The SECURE 2.0 reform also encourages formation of and enrollment in both plan types.

403(b) plans are sponsored by tax-exempt entities. Those sponsored by private institutions, such as charities and private schools, are governed by ERISA. Those sponsored by public institutions, such as public schools and fire departments, are not ERISA-governed. Church plans are also exempt, but may elect to be ERISA-governed, according to Ashner.

The following changes will be made to 403(b) plans via SECURE 2.0:

  1. Collective Investment Trusts. Permission to use CITs was included in an early House bill but was not included in the final law as passed.
  2. Auto-Enrollment and Auto-Escalation: Newly created 403(b) plans must enact the automatic enrollment and escalation features which were also prescribed for 401(k) plans in SECURE. They must start employee contributions at a rate between 3% and 10% and escalate 1% per year until they fall within a range of 10% to 15%. Employees may opt out of either. These processes will operate the same for both plan types. Church and government plans, as well as small and new businesses are exempt.
  3. PEPs and MEPs. 403(b) plans will be allowed to participate in Multiple Employer and Pooled Employer Plans. Ashner says this is designed to help smaller employers start plans by joining existing ones and pooling administrative costs.
  4. ‘De minimis’ incentives. SECURE 2.0 allows employers to offer “de minimis” incentives, such as low-dollar-amount gift cards, to contribute to a plan. This applies to all qualified retirement plans and “is on theme” in increasing participation, says Ashner.
  5. Standardization of Hardship Withdrawal Rules. Ashner explains that SECURE, passed in 2019, expanded hardship withdrawals, but 403(b) plans were left out. SECURE 2.0 fixes that, and now any hardship withdrawal reason or requirement also applies to 403(b) plans. Self-certification rules in SECURE 2.0 apply to both plan types also.

Biden is expected to sign the SECURE 2.0 Act into law by December 31.