Top Considerations for 403(b) Plans in 2024

Sponsors of 403(b) plans have some new choices to consider in 2024. Under the SECURE 2.0 Act of 2022., plan sponsors can add new features to their 403(b) plans to increase opportunities for participation and access to retirement plan funds. Separately, the Internal Revenue Service (IRS) recently expanded its determination letter program to include individually designed 403(b) plans. This affords plan sponsors that do not use a service provider’s pre-approved plan document a helpful new avenue to seek approval of their 403(b) plans in written form. 

Plan sponsors that are aware of optional design features under SECURE 2.0 – and their right to secure approval of their plan with the IRS – can best position their plans to meet the needs of plan participants while maintaining compliance with the Internal Revenue Code.
 
SECURE 2.0 Optional Provisions

The comprehensive package of retirement plan legislation known as the SECURE 2.0 Act impacts all employer-sponsored retirement plans, including 403(b) plans. The changes range in their effective dates from immediate to as far out as 2033, and several changes are mandatory.  However, there are a number of optional provisions that can be adopted now, subject to limitations by the recordkeeper. 

SECURE 2.0 Optional Features to Consider

New in-service distribution options on account of domestic violence, personal emergencies, and qualified federal disasters. If offered under the plan, a participant may self-certify that he or she meets the requirements for the applicable distribution and can request the distribution while still working (in-service). These distributions are subject to specific dollar limits, are exempt from the 10% early withdrawal penalty that normally applies to distributions before age 59 ½, and can be repaid to the plan within three years.

• What to consider: Increased in-service access to retirement plan accounts may cause employees to save more for retirement, since the funds can be withdrawn early in the event of an emergency. Conversely, the ability to access retirement funds for non-retirement uses can also result in plan leakage and reduce an employee’s overall retirement readiness.  Employers that are thinking about adding these new distribution options should consider their employee population and whether these options can, on balance, bolster participation without depleting important retirement savings.

An increase to $7,000 from $5,000 in the automatic distributions permitted for small account balances. Automatic distributions in excess of $1,000 must still be made by direct rollover to an IRA designated by the plan, unless the participant elects to receive the amount in cash or directs a rollover to another plan or IRA.

• What to consider: The automatic distribution of small account balances helps to reduce the number of potential missing participants, since employees are less likely to keep track of small balances when they leave an employer. For plans that already have a $5,000 cash-out limit, an increase to $7,000 likely makes sense. Plans that do not currently have an automatic distribution provision (or those that only have a $1,000 cash-out limit) can also add this provision, as long as they designate an IRA provider to receive amounts above $1,000. 

Hardship distribution changes. Plan sponsors can now allow participants to self-certify that they meet the requirements of a hardship distribution without substantiating their withdrawal request with receipts, invoices, or other documentation. In addition, hardship distributions from 403(b) plans can now be made from earnings (and is no longer restricted to contributions only).

• What to consider: The change to permit self-certification is in line with SECURE 2.0’s general trend in allowing easier access to retirement funds in the case of an emergency. As noted above, this can encourage greater participation by employees who have less income security, but can also leave some participants with less savings at retirement. The change to permit hardship distributions on earnings aligns 403(b) plans to 401(k) plans and should simplify administration.

Roth treatment for employer contributions. If a 403(b) plan provides for employer contributions, such as matching contributions or nonelective contributions, the plan can be amended to permit participants to elect Roth treatment of those contributions. This provides a new way to accumulate Roth funds for retirement, which were previously only available for elective deferrals that an employee makes from his or her paycheck.

• What to consider: If a plan has high utilization of Roth elective deferrals by its participants, the plan sponsor may want to consider allowing an election for Roth employer contributions. Most recordkeepers are not yet ready to implement this provision, so plan sponsors that are interested in adding this feature could consider providing in-plan Roth rollovers in the meantime. An in-plan Roth rollover feature can provide a similar tax result, although a Roth employer contribution would be more streamlined from the participant perspective.

Matching contributions on student loan payments. If a 403(b) plan provides for employer matching contributions, the plan can be amended to provide matching contributions based on an employee’s payment of his or her student loan debt, in the same manner that matching contributions are based on the employee’s elective deferrals to the plan.

• What to consider: This new provision allows employees to build retirement savings before they are ready to make contributions from their own paycheck due to their student loan repayment obligations. Although it certainly increases administration and not all recordkeepers are ready to implement it, a student loan matching contribution is very popular with younger employee populations who are joining the workforce with considerable student debt.

You Want to Adopt Changes, But Your Recordkeeper Can’t Implement Them

Although the optional provisions discussed above can be legally adopted at any time, many recordkeepers are not ready to implement certain changes. In some cases, the recordkeeper is waiting for the IRS to issue guidance that will clarify how these provisions work. In other cases, the recordkeeper needs more time to reprogram its systems to automate new features. In particular, many recordkeepers are not yet able to implement certain new distribution options, Roth treatment of employer contributions, or matching contributions on loan payments. Plan sponsors should discuss any optional changes they want to adopt under their plans with their recordkeepers to determine when it can operationalize those changes.   

IRS Determination Letter for Individually Designed 403(b) Plans

In a welcome development, the IRS recently expanded its determination letter program to individually designed 403(b) plans. A determination letter provides plan sponsors with assurance from the IRS that their plan documents comply with all requirements of the Internal Revenue Code in written form. The plan sponsor can rely on this letter if it operates its plan in accordance with its written terms.

What Is an Individually Designed 403(b) Plan?

An individually designed 403(b) plan is a written plan document maintained by the plan sponsor that is not an IRS pre-approved plan document offered by the service provider. Plan sponsors choose to maintain an individually designed 403(b) plan for a number of reasons. For example, they may have a complicated plan design that does not fit onto pre-approved plan documents due to their “check the box” format and limited election options. These plan sponsors will want to consider requesting a determination letter under the IRS expanded program in order to assure the compliance of their individually designed 403(b) plan documents in written form.

When Can Plan Sponsors File for a Determination Letter?

There is a staggered start date for filing applications beginning June 1, 2023, for three years, after which any plan sponsor may submit an application for an initial determination. In addition, all plan sponsors may submit applications for 403(b) plan terminations beginning June 1, 2023.

Will a Determination Letter Cover SECURE 2.0 Changes?

Generally, a determination letter will only cover changes to the 403(b) requirements that are included on the IRS Required Amendments List issued on or before the last day of the second calendar year preceding the year in which the determination letter application is submitted. Because plans are not yet required to be amended for SECURE 2.0, determination letter applications are not expected to cover SECURE 2.0 provisions for at least two years after those amendments are required. Since plan sponsors only have one opportunity to file for a determination letter (apart from the plan’s termination), they may choose to wait until the letter will cover SECURE 2.0 changes.

Shalina Schaefer is a senior counsel at Ice Miller in Indianapolis.

This feature is to provide general information only, does not constitute legal or tax advice and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS Stoxx or its affiliates. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.