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 optional provisions such as the so-called super catch-up may be looked upon favorably, mandatory provisions such as the automatic enrollment and automatic contribution arrangements present nuanced challenges for the 403(b) industry.

While there are nearly six months left until 2025 data are finalized, 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, using 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 increased the voluntary cash-out limit that an employer can immediately distribute and directly roll over from a workplace retirement plan into an IRA to $7,000 from $5,000. Cochrane also mentioned the super catch-up contribution, which increased the permitted catch-up contribution limits for participants from the year they turn 60 until the year they turn 63.

“There’s no reason not to add [the super catch-up],” Cochrane says. “Whether people partake in it or not? Who knows. But that’s one of the ones … that just make sense to utilize.”

Auto-Enrollment Will Drive Up Participation

Section 101 of SECURE 2.0 mandates that new 401(k) and 403(b) plans—those established on or after December 29, 2022—meet the requirements for an eligible automatic contribution arrangement. This means that plan sponsors must automatically enroll employees at a default contribution rate between 3% and 10%, implement a 90-day unwind feature during which participants can opt out of the plan, and use an automatic escalation of one percentage point per year up to a maximum of at least 10%, but no more than 15%.

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

In 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 number increased in conjunction with a rise of automatic enrollment in 403(b) plans by nearly 20 percentage points. By comparison, 85% of employees with 401(k) plans did the same that year, per Vanguard’s 2025 “How America Saves Report”—a number that has increased four percentage points since 2015.

Webb says automatic enrollment, though historically optional, is likely “the most impactful plan feature” he has seen in more than 30 years of working in the sector. But, he says, there is “a very small pool … that is subject to the new auto-enrollment rule.”

In addition to the SECURE 2.0 provision applying exclusively to new plans, it has extra carve-outs, as those not subject to the rule include: employers with 10 or fewer employees; employers that have been in business for fewer than three years; churches; and governmental plans.

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

Webb says he has not heard “much of a peep out of anyone” regarding the new automatic enrollment requirements for 403(b)s.

Auto-Enrollment Expands Administrative Duties

Despite the potential for higher plan participation rates and a smaller impact on the 403(b) sector than the 401(k) sector, automatic enrollment and contribution still pose challenges for clients.

“Automatic enrollment as a whole is very difficult for 403(b) clients,” says Cochrane. Most 403(b) plans she works with do not use automatic enrollment unless they are mandated to do so.

According to Cochrane, the difficulty lies in the requirement to notify employees before they are automatically enrolled. With the new rule, her clients who must have automatic enrollment must wait to see whether their employees opted to enroll themselves, then implement automatic enrollment if the employee has not done so.

“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 the employee receives their first paycheck.”

Cochrane does see the benefit in defaulting employees into saving early in their careers, but “it’s just because an administrative task came that [it] becomes pretty difficult,” she says.

Optional Provisions Without Traction

With optionality comes the opportunity for opt-outs. Cochrane points to SECURE 2.0’s student loan repayment provision as an optional provision that plan sponsors have been reluctant to implement.

While “student loan repayment mechanisms were ‘really popular’ when SECURE 2.0 came out,” Cochran says, the student 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 instating 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.

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

“Those have been on the docket … the recordkeeper used to do [them] anyway,” Cochrane says. “What changed is the allowability—it doesn’t impact the client, necessarily, but it does make it easier for the recordkeeper.”

Tracking Long-Term, Part-Time Employees Presents Challenges

SECURE 2.0 also shortened to two from 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 work more than 500 hours during each of the prior two years and reach age 21 or older by the end of 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 HR teams, it’s work.”

She says it is a lot of tracking for someone who is unlikely to be contributing to a plan anyway, due to low wages and young age.

Looking ahead, Cochrane says it is possible employers will get used to assigning hours to employees and checking whether employees 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.”

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 identify 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, but they have not yet issued final rules. To date, the IRS and Treasury have received 23 comments on the proposals and the comment window remains open, so 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 makes $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 FICA wages, the wages that are subject to the federal payroll tax that funds Social Security.

“So, 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.

“At the end of the day, [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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