SECURE 2.0 & Retirement Plans: What Independent Schools Need To Know Now

The new law, aimed to help Americans prepare for retirement, impacts schools’ 403(b)/401(k) retirement plans, and leaders need to prepare.

Feb 17, 2023  |  By Evan Giller, Boutwell Fay, LLP, and Gary Mauger, New Pinnacle Consulting Group

From the May/June 2023 Net Assets Magazine.

On December 29, 2022, SECURE 2.0 Act of 2022 was signed into law by President Biden as part of the Consolidated Appropriations Act of 2023. SECURE 2.0 builds on the significant changes enacted by the SECURE Act of 2019 (SECURE Act). The new Act includes some 90 sections containing changes to the rules that govern retirement plans, and it is intended to expand coverage and increase retirement savings.

The Act is widely viewed by the retirement industry as creating conditions that will help Americans improve their financial readiness for retirement. It includes provisions that require either mandatory or optional plan changes, and provisions that are immediately effective as well as many that will be effective in the coming years. We expect that the IRS will provide regulations and other guidance that will clarify the requirements over the next few years.

This article very briefly describes just some of the major provisions that apply to the majority of NBOA member school retirement plans and that either are effective immediately or, while effective in future years, should be reviewed now because they may require changes to systems and administration. We are not covering all of the complexities of these changes, but we want to touch on some of the important rules that may require you to take action.

  1. All new 403(b)/401(k) plans established after December 29, 2022, will be required to include an automatic enrollment provision for elective deferral contributions and an automatic escalation provision. Certain employers are exempt, including governmental, church, and employers with fewer than 10 employees. This requirement is effective only for plans established after the enactment of SECURE 2.0 (so it does not apply to plans in existence before enactment) and is effective for plan years beginning after December 31, 2024.
  1. If the retirement plan includes Hardship Withdrawals, an in-service distribution option, employees may now self-certify that they are eligible for such a withdrawal. Self-certification means that the plan administrator or the recordkeeper no longer must independently determine whether participants have had an event under the IRS’ safe harbor list of events that entitles them to a hardship withdrawal. Additional regulations will be forthcoming on addressing situations where the employee misrepresents his or her eligibility. This provision is effective in plan years beginning after the date of the enactment of SECURE 2.0.
  1. Employers will soon be required to allow long-term, part-time employees to participate in 403(b) plans. This is a new requirement for 403(b) plans and modifies the existing requirement for 401(k) plans that was implemented under the SECURE Act. When an employee completes 2 consecutive years of service consisting of at least 500 hours of service, the employee will be eligible to contribute elective deferrals. This rule does not require employer contributions and it is unclear how the rule affects current universal availability rules for 403(b) plans. While not effective until plan years after 2024, plan sponsors need to have procedures in place to track hours now so they will be able to know who is eligible when the rule takes effect in two years.
  1. Effective immediately, plans have the option to allow participants to elect to treat employer contributions as Roth The employer Roth contributions must be 100% vested immediately. It is expected that implementing this shift in the treatment of contributions will take time to fully implement and may pose administrative challenges. Among other changes that will be necessary, recordkeepers will need to update recordkeeping systems, schools will need to update payroll and tax reporting systems, and participants will need to be given the opportunity to elect Roth treatment of employer contributions. At the same time, Roth contributions to retirement plans are now exempt from the required minimum distribution rules that apply to a participant when alive
  1. A 403(b) or 401(k) plan will not violate the rules of section 403(b) or 401(k) if it makes distributions for personal or family “emergency expenses.” At most, only one emergency withdrawal is permitted per year up to a maximum of $1,000. An emergency withdrawal is also exempt from the 10% additional tax on early distributions. A plan administrator can rely on the self-certification of the participant that the participant satisfies the conditions for an emergency withdrawal. The rule provides the participant with the option to repay the distribution within three years. But as a further restriction on withdrawals, no additional withdrawals can be taken during the three year repayment period unless repayment occurs, or if the participant contributes an additional amount to the plan that exceeds the amount of the previous withdrawal that has not been repaid. This is an optional provision that applies to distributions after December 31, 2023.
  1. Effective for distributions that must be made after December 31, 2022, the age at which a participant must begin Required Minimum Distributions is increased to:
    1. 73 for a person who attains age 72 after December 31, 2022 and age 73 before January 1, 2033
    2. 75 for an individual who attains age 74 after December 31, 2032
  1. Individuals who miss a Required Minimum Distribution are subject to an excise tax on the amount that should have been withdrawn. For taxable years beginning after December 29, 2022, the excise tax has been reduced from 50% to 25%. The tax is further reduced to 10% if the error is corrected within two years.
  1. Effective immediately, the Employee Plans Compliance Resolution System (EPCRS) the IRS’s program for correcting plan errors, has greatly expanded a plan’s ability to use self-correction, meaning that many more corrections can be made without filing with the IRS. Self-correction can now be used without time limit and regardless of whether the errors are significant or insignificant. This change is effective immediately, but we expect additional guidance from the IRS to clarify the application of the new rules.
  1. Under the SECURE Act, a new type of multiple employer plan, the Pooled Employer Plan (PEP) was introduced for defined contribution plans other than 403(b) plans. SECURE 2.0 has now expanded MEP and PEP coverage to include 403(b) plans. This means that different employers can come together to establish a single plan and take advantage of economies of scale. This provision is effective immediately.

SECURE 2.0 contains many other significant provisions that will be of interest to plans of NBOA member schools, and we want to briefly mention a few of them. These include:

  • Higher catch-up limits for elective deferrals apply at ages 60 – 64. Effective for taxable years beginning after December 31, 2024.
  • To help employees who are burdened with student loan debts save for retirement, plans can treat loan re-payments as elective deferrals and contribute matching contributions on behalf of those employees repaying their loans. Effective for contributions made in plan years beginning after December 31, 2023.
  • Elective deferral catch-up contributions for participants whose wages exceed $145,000 (as defined under Code section 3121(a) and as indexed for inflation) in the prior year must be contributed on a Roth basis. As a practical matter, this means all plans that allow catch-up contributions must now include a Roth account. Effective for taxable years beginning after December 31, 2023.

SECURE 2.0 is a very expansive piece of legislation that is likely to affect the design and administration of virtually every qualified and 403(b) retirement plan. Plan sponsors will want to consult with their advisors to determine how best to implement the mandatory provisions and to consider whether to adopt the optional provisions.


Evan Giller

Evan Giller is Of Counsel to the law firm of Boutwell Fay, LLP

Gary Mauger

Gary Mauger is a Managing Partner at New Pinnacle Consulting Group, a Division of Pentegra


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