SECURE 2.0’s effect on 403(b) Plans

At the end of 2022, the SECURE Act 2.0 was enacted to replace its precursor SECURE Act of 2019. SECURE Act 2.0 makes big changes to qualified retirement plans, including 403(b) retirement savings plans often offered to employees of nonprofit organizations. Let’s examine the changes that will affect 403(b) retirement savings plans.

• The contribution limit for 2023 is $22,500.
• Organizations can choose to contribute to their workers’ plans up to a total from all sources of $66,000 in 2023 ($73,500 for employees ages 50 and older)

Effective in 2023

Only some SECURE 2.0 Act provisions will impact 403(b) plans immediately. The following will be in effect for 2023:

Required Minimum Distributions (RMD)

Generally, 403(b) plan participants must start taking required minimum distributions (RMDs) after age 72. The first SECURE Act raised this threshold from 70½ and the new law bumps RMDs up to age 73, beginning in 2023. In 2033, the age for RMDs increases to 75 years. Also, the 50% penalty for failing to take timely RMDs will be lowered to 25% for tax years beginning after the date of enactment and reduced further to 10% if the account owner withdraws the missed amount and submits a corrected tax return.

Plan Start-Up Credit

Previously, nonprofits with 100 employees or fewer could claim a tax credit equal to 50% of the cost of setting up a 403(b) plan (up to a maximum of $500) for three consecutive years. The first SECURE Act increased that amount to $5,000. And beginning in 2023, organizations with 50 or fewer employees may qualify for a credit equal to 100% of the set-up cost, up to $1,000, phased out over five years.

Contribution Incentives

The new law allows organizations to give employees small financial incentives (gift cards to restaurants and similar) to encourage contributions to 403(b) plans.

Collective Investment Trusts

Effectively immediately, the list of permitted investments in 403(b) custodial accounts is expanded to include collective investment trusts (CITs). However, the new law doesn’t include additional legislation required to facilitate CIT investments.

Multi-Employer Plans

Beginning with plan years after the date of enactment, most 403(b) plans are permitted to become part of multi-employer plans, including pooled employer plans.

Effective in 2024

Employers have almost a year before the following changes become effective:

Roth 403(B) Accounts

Some nonprofits offer employees Roth 403(b) plans (generally in addition to traditional 403(b) plans). Beginning in 2024, employees with wages of $145,000 and greater must make catch-up contributions to a Roth 403(b) account. This figure will be indexed for inflation. Roth 403(b) contributions are made with after-tax dollars, but withdrawals are generally tax-free. One part of this provision is actually effective immediately: Employees may elect to use a Roth 403(b) for matching contributions.

Emergency Savings Accounts (ESAs)

Starting in 2024, nonprofits may allow employees to tap ESAs linked to their 403(b) plans. Workers generally may withdraw up to 3% of their salaries (or a maximum of $2,500) from an ESA. Contributions to these accounts are made on an after-tax basis.

Student Loan Match

Effective in 2024, employers can elect to make matching contributions to employees’ 403(b) accounts based on their student loan obligations. This provision is intended to encourage workers to save for retirement even if they’re still paying off student loans.

Effective In 2025

The following provisions become effective starting in 2025:

Automatic Enrollment

For new plans adopted after 2024, nonprofits must provide automatic enrollment. Employees can then choose to opt out if they don’t want to participate. Note that organizations with 10 or fewer employees or that have been in operation for less than three years aren’t required to meet this mandate.

Catch-Up Contributions

Employees who are age 60 to 63 can make larger catch-up contributions of $10,000 or 150% of the regular catch-up limit, whichever is greater. The base catch-up amount will be indexed annually for inflation.

Part-Time Worker Participation

Under the first SECURE Act, part-time workers are eligible to participate in their employer’s 403(b) plan if they have 500 hours of service each year for three consecutive years. Starting in 2025, the eligibility requirement will fall from three years to two years.

Taking Steps to Ensure Your Nonprofit’s Compliance with SECURE 2.0

SECURE 2.0 is an extensive law with numerous components. Your best course of action to ensure compliance is to focus on the rules already in effect in 2023, and then prepare for the changes that will happen in 2024 and 2025. If you would like more information about what these modifications mean for your nonprofit’s 403(b) plan, contact us.