SECURE 2.0 Impacts on Governmental Plans

by | Jan 23, 2023 | 401(a), 403(b), Governmental Benefits, Plan Administration, Plan Qualification

This post highlights many of the significant law changes affecting governmental retirement plans that are part of the recently adopted Secure 2.0 Act of 2022 (the Act).

The table below simply highlights “what” is changed, “when” the change takes effect, and “whether” the change is automatic or optional. Although a number of the changes are “automatic,” we will not know how to implement them until we receive further guidance from the IRS.

 

WHAT WHEN WHETHER
Participant deferral elections to governmental 457(b)s can now be made at any time prior to the date compensation becomes available. This is a significant change from the current rules.

 

now Automatic. Will require re-education of staff and explanations to employees.
Governmental employers may be able to make retirement plan matching contributions when employees pay their qualified higher education expenses or loans.

 

Plan years (PYs) beginning after 2023 Optional.
457(b) catch-up contributions by higher-paid employees (making $145,000 or more) will have to be treated as “after-tax,” Roth contributions.

 

2024 Optional. Employers will have to amend affected plans if they wish to allow affected “catch-ups.”
Participants may be able to designate some or all employer matching and/or nonelective contributions as Roth contributions.

 

now Optional. Employers will have to amend affected plans if they wish to allow such treatment.
The age-50 catch-up limit will be increased for individuals who attain 60, 61, 62, and 63.

 

2025 Applies if catch-ups are allowed, and subject to possible. “Roth” treatment.
Increase in age for required minimum distributions (from 72 to 75).

 

Phases in over 10 years between 2023 and 2033. Automatic.
Expansion of permissible 403(b) plan investments to include group trusts.

 

now Optional. Applies to 403(b) custodial accounts.
Greater flexibility to “self-correct” under EPCRS – particularly, “inadvertent failures.”

 

Although applicable upon enactment, need to wait for further IRS guidance. Automatic.
Post-retirement age service-related disability pension or retirement distributions to first responders may be excludable from gross income.

 

2027 Although automatic, need further guidance from IRS.

Although all affected employers will be given time to consider and adopt written amendments reflecting all automatic changes, as well as optional changes that the employer has chosen to implement, governmental employers and their staffs need to remember that current implementation of an “optional” law change is a “de facto” plan amendment – one which may require city council or governing board approval.  Often times, the HR staff that “make” these changes do not have the authority under the plan document to make these changes.

 

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.

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