Yes, be like Mike. This goes way back to a Gatorade commercial featuring Michael Jordan. It was released in August 1991 and portrayed Michael Jordan in the 1991 NBA Finals. The upbeat pop song in it starts out with the lyrics, “sometimes I dream that he is me” and ends with the phrase “if I could be like Mike.” It seems like 403(b) plans are going through that same dream, except that dream is to be like a 401(k) plan. Recent regulations in SECURE Act 2.0 are making this dream come true. Let us examine the “be like Mike” moment here.
a brief background and changes ahead
There are three general types of 403(b) plans: Commercially purchased annuities, custodial accounts that may invest in mutual funds only and retirement income accounts that churches and related organizations may establish. These types of plans may be established by tax-exempt organizations, public schools, religious organizations and health/hospital organizations. Oddly, these plans have been around a long time, but with significant differences from a 401(k) plan.
In the last fifteen years or so, these plans have become more like 401(k) plans. It all started in 2009 with the requirement for 403(b) plans to have a written plan document. That was the first change to 403(b) plans in more than forty years. Since 2009, these plans have evolved, through regulations, to be more like their 401(k) plan cousin. It accelerated quite a bit with the recent enactment of the SECURE Act 2.0 of 2022. Below are the “be like Mike” regulations that take effect starting now and into the near future.
Related Read: How will SECURE 2.0 Affect Your Retirement Plan Administration?
Multiple employer 403(b) plans
Except in the case of church plans, SECURE 2.0 now permits 403(b) plans to participate in a Multiple Employer Plan (MEP). A MEP is a plan sponsored by an association, which allows unrelated employers to participate in it. MEP’s have been around a long time for qualified plans like a 401(k), and are now available for 403(b) plans starting in 2023.
A 403(b) MEP may be attractive for small employers by keeping down the cost of services and investments due to a large pool of employers and participants. Employers may lose flexibility in plan design, services and investment offerings through MEP participation, however. It may also be a while before someone starts offering this type of arrangement even though they are effective now.
Beginning in 2024, 403(b) plans may now be more like their 401(k) cousins with the ability to allow hardship withdrawals from more sources. Traditionally, 403(b) plans could only pay hardship withdrawals from elective deferrals. That option now includes non-elective and matching contributions along with earnings. In addition, a participant is no longer required to take a plan loan before requesting a hardship withdrawal. These are optional changes for plan sponsors to consider.
LONG-TERM PART-TIME EMPLOYEES
Like their 401(k) counterpart, 403(b) plans are now subject to the long-term part-time (LTPT) employee rule. SECURE 2.0 changed the rule slightly and included 403(b) plans in it. With the change, 403(b) and 401(k) plans will have to include LTPT employees, who complete at least five hundred hours of service in each of two consecutive years, as eligible plan participants. This required change becomes effective for plan years starting in 2025.
Your LTPT employees will have to be given enrollment communications and offered the opportunity to make elective deferrals. Plan sponsors are not required to provide non-elective or matching contributions on behalf of these employees.
COLLECTIVE INVESTMENT TRUSTS
A welcome change made in SECURE 2.0 was to allow 403(b) plans to invest in Collective Investment Trusts (CITs). Up until now, 403(b) plans were restricted to investing in annuity contracts and mutual funds. A CIT is an investment fund that may invest and function just like a mutual fund, but is not required to register with the SEC.
CIT’s have become popular investment options with 401(k) plans in the last ten to fifteen years due to their lower cost structure. Though this change is effective immediately, security law changes were not made to exempt registration. These changes will need to be made into law through the SEC before CITs are an option for 403(b) plans. Once this change is made, CIT investments will be available to 403(b) plans just like 401(k) plans.
Related Read: 401(K) Plan Early Access: How to Avoid Penalties
other “Mike-like” changes
There are a host of other SECURE 2.0 changes that are mostly optional. These changes are new to both 403(b) plans and 401(k) plans. With these changes applicable to both these plans, Congress seems to be trying hard to lessen the differences between them.
Some optional changes include employer matching contributions on student loan payments, emergency savings accounts and distributions, increased limitations on catch-up contributions and Roth catch-up contributions on behalf of highly compensation individuals.
Required changes to new 403(b) and 401(k) plans are the inclusion of automatic enrollment and escalation features in the plan. Employee elective deferrals must start at 3% to 10% and escalate 1% per year until in the range of 10% to 15%. Employees do have the option to opt out of these features. This requirement becomes effective in 2025.
JUST LIKE MIKE
With the multitude of these “Mike-like” changes made by SECURE Act 2.0, it will take time for plan administrators and associations to update their systems and begin implementing them. Now is a suitable time to start learning these changes and to assess how they may impact your organization and retirement plan.
For more information, contact Larry Ruff at [email protected], or call him at 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.