SECURE 2.0 Delivers a Mixed Bag to the 403(b) Arena

Several mandatory and optional provisions of the SECURE 2.0 Act of 2022 took effect this year, requiring administrative changes and adaptations for recordkeepers, plan sponsors and employees alike. While some optional provisions such as the so-called super catch-up may be looked upon favorably in the 403(b) industry, some of the mandatory ones, such as the automatic enrollment and automatic contribution arrangements, present nuanced challenges.

Some financial advisers already have a sense of how SECURE 2.0—which built on the Setting Every Community Up for Retirement Enhancement Act of 2019—has affected their 403(b) clients so far this year, and what remains to be seen.

Optionality Garners Support

SECURE 2.0 “enables employers to take a breath and say, 'Do these optional provisions really fit my plan?'” says Mike Webb, a senior manager in the retirement plan consulting group at CAPTRUST. He sees provisions with less administrative work as favorable and cites the one pertaining to disaster-related emergency distributions as a low-controversy example.

Kim Cochrane, senior director of client services for Hub International’s Mid-Atlantic region, says she has no doubt “the mandatory cash-out increase” has been an optional provision easily adopted, referring to the law’s Section 304. It raised the voluntary cash-out limit, from $5,000 to $7,000, that an employer can immediately distribute and directly roll over from a workplace retirement plan into an individual retirement account. Cochrane also mentioned the super catch-up contribution, which increased the age limit from the year the participant turns 60 until she turns 63.

“There’s no reason not to add [the super catch-up],” Cochrane says.

Auto-Enrollment Will Spur Participation

Section 101 of SECURE 2.0 mandates that 401(k) and 403(b) plans established on or after December 29, 2022, meet the requirements for an eligible automatic deferral arrangement. This means that plan sponsors must automatically enroll employees at a default deferral rate between 3% and 10%, implement a 90-day "unwind" feature, which allows participants to opt out, and add automatic escalation of one percentage point per year up to 10% through 15%.

Webb predicts auto-enrollment will “have a positive effect on 403(b) participation,” which has historically lagged that of 401(k)s, but that gap has been narrowing.

Citing data from 2022, the last year for which data are available, the Plan Sponsor Council of America’s 2023 403(b) Survey reported that 80% of eligible employees contributed to their 403(b) plans, a record high. This followed a nearly 20-percentage-point rise in the use of auto-enrollment in 403(b) plans. By comparison, 85% of employees with 401(k) plans contributed that year, per Vanguard’s 2025 “How America Saves."

Webb says automatic enrollment, though historically optional, is probably the most effective plan feature he has seen in more than 30 years of working in the sector. But, he says, only “a very small pool [of the plans] … is subject to the new auto-enrollment rule.”

Exempt employers include those with 10 or fewer employees; those in business for three years or less; churches; and governmental plans.

“What you’re left with is the private sector, nonprofit, non-church plans … and even those, … if under 10 employees, are exempt,” Webb says. “We have a lot more smaller entities in the 403(b) space than in the 401(k) space.”

He adds he has not heard “much of a peep out of anyone” regarding this new requirement.

Auto-Enrollment Expands Administrative Duties

For employers that will need to comply, auto-enrollment and -deferral are expected to pose challenges.

“Automatic enrollment as a whole is very difficult for 403(b) clients,” says Cochrane. Most 403(b) plans she works with use the feature only if mandated to.

According to Cochrane, the difficulty lies in employers needing to wait to auto-enroll their employees and notify them of the new practice. With the new rule, her affected clients must see whether their employees opt to enroll themselves before starting the auto-enrollment process.

“That creates more work for an employer,” Cochrane says. “Recordkeepers really cannot help with automation much, as they often do not know an employee exists until [he] receives [his] first paycheck.”

Cochrane says she sees the benefit in defaulting employees into saving early in their careers, but the accompanying administrative task makes it "pretty difficult."

Optional Provisions Without Traction

With optionality comes the opportunity for sponsors to just opt out. Cochrane points to SECURE 2.0’s student loan repayment provision as an optional provision they have been reluctant to implement.

While “student loan repayment mechanisms were ‘really popular’ when SECURE 2.0 came out,” Cochrane says, the loan debt provision of the act “really didn’t gain traction.” One reason is because employees have to repay their loans to qualify for the match.

“In the 403(b) world, it’s a lot more common for the employer contribution to be made on behalf of all employees, regardless of whether they contribute,” she says.

Emergency savings, likewise, is an optional provision that “plans are not jumping onboard with yet either,” Cochrane says. Some plans are implementing the provision, while some are installing an outside-the-plan emergency savings mechanism, she says.

“[It’s] a real simple solution to add, but every recordkeeper is doing it kind of differently,” says Cochrane.

She also describes the option to self-certify for hardship withdrawals as a provision that has not gained much traction.

“What changed is the allowability—it doesn’t [affect] the client, necessarily, but it does make it easier for the recordkeeper," Cochrane says.

To Track Long-Term, Part-Timers Presents Challenges

SECURE 2.0 also shortened, from two to three, the required years of consecutive service for long-term, part-time employees to be eligible to contribute to their employer’s plan. For plans beginning after December 31, 2024, employees must have worked more than 500 hours during each of the prior two years and have reached at least age 21 by the end that period to be eligible to participate.

In the 403(b) world, the universal availability requirement says that if any employee of an employer is eligible to make elective deferrals to a 403(b) plan, then all employees, subject to certain exceptions, must have the right to do so. One of the exclusions applies to those who normally work fewer than 20 hours per week. What the new rule for long-term, part-time employees does, however, is supersede that exclusion.

Cochrane calls the provision a “disaster.” Using the example of a camp counselor who gets paid a stipend of $2,000 for the summer, she explains: “[Recordkeepers] now have to be able to track [the counselor’s] hours … [and ask], ‘Is it more than 500 [hours]? Or less than 500?’

“Payroll systems aren’t always built to be able to track hours when you’re paying people a stipend,” Cochrane says. “Whenever you add additional complexity to [human resources] teams, it’s work," especially when employees will be unlikely to contribute to the plan anyway, due to young age and/or low wages, she says.

Looking ahead, Cochrane says, it is possible employers will get used to assigning hours to employees and checking whether they have reached 500 hours in consecutive years.

“I think [payroll systems] will eventually get advanced so that they will be able to do all this tracking for [employers],” she says. “But it has yet to be determined.”

The Jury’s Still Out

Both Webb and Cochrane say they have seen recordkeepers able to support, to date, the mandatory provisions that have taken effect since the passage of SECURE 2.0. Some of the more complicated provisions take effect in 2026.

“We [have] some major provisions coming up where the jury is still out on whether there’ll be … fulfillment of those provisions by the recordkeepers,” Webb says.

Webb and Cochrane both identified one provision in particular: Section 603, regarding catch-up contributions for participants whose prior-year wages exceed $145,000. Those participants’ contributions will have to be made on a Roth, after-tax basis.

There is no apparent problem with the provision “until the rubber hits the road,” Cochrane says. The Department of Treasury and the IRS issued, in January, proposed regulations for the Roth catch-up contribution requirement. As of the closing date to the public comment period, the agencies had received 23 comments on the proposals. It is unclear when final regulations will be published.

The complexity comes in coding. With the new catch-up rule, there are four types of contributions: a regular pre-tax contribution, a regular Roth contribution, a catch-up pre-tax contribution and a catch-up Roth contribution.

To further illustrate the complexity, Cochrane uses the example of an employee who earns $130,000 in income and then receives a $15,000 bonus on December 31. Once employees make $145,000, they will be required to make a Roth catch-up contribution in the following year, instead of a pre-tax contribution. Once they do, a recordkeeper will have to recharacterize the employee’s contribution.

The issue comes down to the rule’s applicability to an employee’s Federal Insurance Contributions Act wages — the wages that are subject to the federal payroll tax that funds Social Security.

“Do you have a separate indicator on your payroll for what [an employee’s] FICA wages would be, [as separate from] other wages?” Cochrane says.

Both Cochrane and Webb suggest that the provision’s effective date, January 1, 2026, might be delayed further. It was originally anticipated to take effect January 1, 2023.

“The provision is … more difficult than what would otherwise be assumed,” Cochrane says.

Looking at the overall impact of SECURE 2.0, Webb does not anticipate the legislation will drive employers to consider adopting alternative retirement plans to replace their 403(b)s. “The jury’s still out," Webb says, but employers are “more committed to their 403(b) plans than ever.”

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