But 403(b)s aren’t out of the woods yet on CITs. The bill may have some technical difficulties moving forward. While it is a bipartisan effort with a fair number of cosponsors, it may be linked to another large piece of legislation involving access to capital markets for smaller companies. Riding along as a substitute to a larger, more complex bill could delay the 403(b) bill’s progress forward.
The passage of the Secure 2.0 Act had major changes on many American’s retirement planning options. The process was complex, drawn out, and not without its problems. Six months after it was made into law, analysts and lawmakers have noted a few key holes in the Act. One may involve catch-up contributions and a drafting error. Another involves the lack of parity between 403(b) and 401(k) plans as to collective investment trusts (CITs). There may be more areas in need of clarification that arise as the timelines for some aspects of the bill begin. We discuss these two topics here and will continue to watch for more.
It may be helpful to remember that some of the provisions in the SECURE Act and SECURE 2.0 Act took effect before or at the beginning of 2023. Some of those provisions include changes to SIMPLE and SEP Roth IRAs, matching contribution to Roth Accounts, and increases in credits for start-up companies who offer retirement plans. Others involved changing the treatment or penalties for withdrawals from retirement plans, for terminal illness, hardships, and natural disasters and for adoption.[1] A handful of other major changes begin in January of 2024, including Matching Student Loan Payments, Emergency Savings Accounts, Penalty-Free Withdrawals, Automatic Enrollment Relief, Charitable Distributions from Annuities, and age based catch-up contributions. Finally, several other key provisions are set to begin in January of 2025. Some of those changes include provisions concerning automatic enrollment for new plans, the creation of a national database to locate 401(k) plans that may not have been rolled over, and an increase in the annual catch-up contribution limit.[2]
Those portions regarding catch-up contributions, specifically those concerning age-based catch-up contributions have caught the attention of some policy analysts for potentially having a technical error. According to Brian Graff at the American Retirement Association, the way Congress amended the tax code concerning catch-up contributions included a slip up in removing and replacing provisions in the Secure 2.0 Act. The slip-up could keep some retirement plan participants from making catch-up contributions in the next year. Members of Congress have drafted a note that the language may need clarification. “Congress’s intent was to require catch-up contributions for participants whose wages from the employer sponsoring the plan exceeded $145,000 for the preceding year to be made on a Roth basis and to permit other participants to make catch-up contributions on either a pre-tax or a Roth basis.”[3]
Unlike age-based contributions, the lack of parity between 401(k) plan participants and 403(b) plan participants was not overlooked at drafting. Instead, it was front and center. At the time that the SECURE 2.0 Act was in its final hours, concerns over consumer protection kept the parties from agreeing whether 403(b) participants should have the option of collective investment trusts (CITs). A new bill making its way through the legislative process may help fix that. The new bill includes the language present in the version of the SECURE 2.0 Act that passed but was missing from the final version that combined the House and Senate versions.[4] When a bill passes the House and Senate but has different provisions, the differences are worked out through a process overseen by the House Ways and Means Committee. When it came to CITs for 403(b)s, the securities aspects of that provision couldn’t be worked on in Ways and Means in time for the deadline to enact the bill.[5] And, the committee that could have addressed it had a conflict over whether CITs for 403(b)s should be extended to all 403(b)s or only those that were ERISA-governed. Now that committee has approved a plan that should remedy the disparity.[6]
But 403(b)s aren’t out of the woods yet on CITs. The bill may have some technical difficulties moving forward. While it is a bipartisan effort with a fair number of cosponsors, it may be linked to another large piece of legislation involving access to capital markets for smaller companies.[7] Riding along as a substitute to a larger, more complex bill could delay the 403(b) bill’s progress forward.
Additionally, analysts and tax professionals note that the access to CITs for 403(b)s will have many complex limits. “Consider instructive, however, that only the variable annuities which are registered have been able to be offered in this part of the 403(b) market, in spite of a wide variety of non-registered group annuities which are otherwise available to retirement plans. Similar rules will apply to the offering of CITs, as well. So, again, any decision to proceed will be complex, and will require advice of serious counsel.”[8]
[1] https://www.nextgen-wealth.com/blog/secure-act-2-0-changes-going-into-effect-in-2023
[2] https://anderscpa.com/secure-act-2-0-provisions-2024
[5] https://www.planadviser.com/committee-change-secure-2-0-not-allow-cits-403bs
[6] https://www.plansponsor.com/house-committee-approves-bill-allowing-cits-in-403b-plans
[7] See HR 2799, titled Expanding Access to Capital Markets.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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