Of the over 90 provisions contained in the SECURE 2.0 legislation is a handful that only apply to retirement plans of nonprofit, tax exempt organizations (EOs). One is specific to EOs sponsoring 457(b) plans and others involve 403(b) plans. These provisions are discussed below.
457 RMD Amendment Deadline Extended. Late last year, I wrote on how, unlike 401(k) or 403(b) plans whose deadline was generally extended to the end of the plan year beginning in 2025, calendar year 457(b) plans of non-governmental EOs had to be amended by the end of 2022. Specifically an amendment was needed for the raising of the age for required minimum distributions (RMDs) from age 70 1/2 to age 72, unless legislation were enacted postponing the deadline. See Tax Exempt Organizations Must Amend 457(b) Plans By December 31 For Increased RMD Age. Well, SECURE 2.0 was enacted on December 29 and contains a provision extending the deadline to conform to the 2025 deadline of other plans.
For EO sponsors who amended their plans by year-end there is no harm in doing so. Those who bore the risk, won the bet. However, SECURE 2.0 also raises the age for participants turning age 72 after December 31, 2022, to age 73. It further raises the age to 75 for participants turning age 74 after 2032. Thus, additional amendments will have to be made by 2025. And, of course, the plan will have to be operated in accordance with the new law before being amended.
403(b) Changes. The following provisions specifically address EOs that sponsor 403(b) plans.
MEPs and PEPs. SECURE 2.0 allows multiple employer plan (MEPs) and pooled employer plan (PEPs) to be made up of sponsors of 403(b) plans beginning in 2023. These are plans allowing multiple employers to join together to get economies of scale when it comes to plan expenses such as recordkeeping and investment charges..
Collective Investment Trusts. Effective immediately, the tax code allows 403(b) plans to invest in collective investment trusts. Previously such plans could only offer annuities or mutual funds as investments. However, before an EO can actually implement such a change the federal Securities laws also need to be changed.
Hardship Withdrawals. For plan years beginning after 2023 a 403(b) plan may allow hardship withdrawals to be made from employer contributions instead of only employee elective contributions. Specifically hardship withdrawals can be made from qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs) and earnings from such contributions.
Long Term Part-Time Employees. In 2019, the original SECURE Act required 401(k) plans to begin permitting any part-time employee that worked more than 500 hours for three consecutive years to be able to make elective deferrals to the plan beginning in 2024. This provision did not apply to 403(b) plans. SECURE 2.0 expands it to 403(b) plans effective for plan years beginning after 2024. It also reduces the number of consecutive years of 500 or more hours to two for both types of plans. This is a significant change to the universal availability rule for 403(b) plans which allowed the exclusion of employees who normally work less than 20 hours per week and who did not accumulate 1,000 total hours in the eligibility period.
Conclusion. EOs that sponsor such plans have time to make amendments to the plans. However, plans must be operated in accordance with applicable changes upon becoming effective. The RMD rules changes and Long Term Part-Time Employee changes are required amendments. The collective investment trusts and hardship withdrawals are in the discretion of the employer as a matter of plan design.