Private sector workers aren’t the only ones who stand to benefit from the SECURE 2.0 Act of 2022 passed by Congress last week. The landmark retirement reform legislation also marks an important step in strengthening the financial security of the nation’s public service workforce.
SECURE 2.0 will help public sector employees in a variety of ways, perhaps none more impactful than through the expansion of automatic enrollment and multiple employer plan rules for 403b plans.
“Financial security is a growing concern for public service employees,” said Lynne Ford, CEO and President of MissionSquare Retirement, a nonprofit financial services company with $69 billion AUMA focused on the public service sector. “We applaud federal lawmakers for enacting important changes that are a step in the right direction toward strengthening retirement savings for our nation’s public workers.”
“This Congressional action can achieve the dual goals of fortifying workers’ retirement security and helping state and local policymakers facing workforce challenges.”
MissionSquare Retirement’s Lynne Ford
In recent years, MissionSquare Retirement points to an increased focus on the financial wellbeing of state and local government employees. Amid the COVID-19 pandemic and Great Resignation, more than half of state and local workers say they are inclined to leave their jobs, driven largely by a need for better pay and benefits.
Moreover, some 44% of state and local workers reported that they and their family had been negatively impacted financially by the pandemic. When it comes to retirement, only 20% of state and local workers are extremely or very confident that their pension will cover all of their living expenses, and only 41% of public sector human resources professionals feel their employees are financially prepared for retirement.
“Often overlooked is the fact that retirement benefits are a critical workforce recruitment and retention tool for government employers. This Congressional action can achieve the dual goals of fortifying workers’ retirement security and helping state and local policymakers facing workforce challenges,” Ford said.
Key changes coming
SECURE 2.0 Section 101 requires 401k and 403b plans to automatically enroll participants in the respective plans upon becoming eligible (and the employees may opt out of coverage), effective for plan years beginning after December 31, 2024. The initial automatic enrollment amount is at least 3% but not more than 10%. Each year thereafter that amount is increased by 1% until it reaches at least 10%, but not more than 15%. All current 401k and 403b plans are grandfathered. There are some exceptions for church plans and governmental plans. Section 101 is effective for plan years beginning after December 31, 2024.
Section 106 allows 403b plans, which are generally sponsored by charities, educational institutions, and non-profits, to participate in MEPs and PEPs, including relief from the one bad apple rule so that the violations of one employer do not affect the tax treatment of employees of compliant employers. Section 106 is effective for plan years beginning after December 31, 2022.
CITs in 403bs needs more work
Allowing the use of CITs as lower-cost investment options in 403b plans used by public schools, colleges, universities, and other tax-exempt organizations is one of the key reforms for which MissionSquare Retirement advocated. Section 128 of SECURE 2.0—effective as of 2023—takes the needed first step toward providing 403b plans overall lower cost options by allowing the use of CITS or group trusts.
However, the legislation doesn’t include the revisions to federal securities laws that CIT providers will likely need before admitting 403b plans sponsored by tax-exempt organizations. Going forward, Congress will need to provide securities law changes in order for these plans to be able to take full advantage of these cost-savings investment options.
Additional provisions
With the help of a section-by-section summary of the SECURE 2.0 Act of 2022 provided by the Senate HELP Committee, here is a look at some additional provisions impacting public sector workers.
Section 112 details the military spouse retirement plan eligibility credit for small employers. Military spouses often do not remain employed long enough to become eligible for their employer’s retirement plan or to vest in employer contributions. Section 112 provides small employers a tax credit with respect to their defined contribution plans if they (1) make military spouses immediately eligible for plan participation within two months of hire, (2) upon plan eligibility, make the military spouse eligible for any matching or nonelective contribution that they would have been eligible for otherwise at 2 years of service, and (3) make the military spouse 100% immediately vested in all employer contributions. The tax credit equals the sum of (1) $200 per military spouse, and (2) 100% of all employer contributions (up to $300) made on behalf of the military spouse, for a maximum tax credit of $500. This credit applies for 3 years with respect to each military spouse—and does not apply to highly compensated employees. Section 112 is effective for taxable years beginning after the date of enactment of this Act.
Section 306—effective as of 2023—eliminates the “first day of the month” requirement for governmental section 457b plans. Under current law, participants in a governmental 457b plan must request changes in their deferral rate prior to the beginning of the month in which the deferral will be made. This rule does not exist for other defined contribution plans. Section 306 allows such elections to be made at any time prior to the date that the compensation being deferred is available.
Section 602 addresses hardship withdrawal rules for 403b plans. Under current law, the distribution rules for 401k and 403b plans are different in certain ways that are historical anomalies for varied reasons. For example, for 401k plans, all amounts are available for a hardship distribution. For 403b plans, in some cases, only employee contributions (without earnings) are available for hardship distributions. Section 602 conforms the 403b rules to the 401k rules, effective for plan years beginning after December 31, 2023.
Section 328 outlines the repeal of direct payment requirement on exclusion from gross income of distributions from governmental plans for health and long-term care insurance. Current law provides an exclusion from gross income ($3,000) for a distribution from a governmental retirement plan to a public safety officer to pay for their health insurance premiums. The exclusion requires that the plan directly pay the insurance premiums. Section 328 repeals the direct payment requirement and is effective for distributions made after the date of enactment of SECURE 2.0.
Finally, Section 330 addresses an exemption from early withdrawal penalty for certain State and local government corrections employees. Section 330 extends the public safety officer exception to the 10% early distribution tax to corrections officers who are employees of state and local governments, effective for distributions made after the date of enactment of SECURE 2.0.
SEE ALSO:
• PASSED! SECURE 2.0 Awaits Biden’s Signature After $1.7T Spending Bill Clears House Friday