By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
The last few years have seen a shifting landscape in the retirement plan marketplace due to significant regulatory changes like SECURE Act 1.0 and 2.0. Much of the focus and communication with these regulatory changes has centered around the impact with for-profit employers and the retirement programs typically used by those groups (e.g., 401(k) plans).
However, the recent legislation has also created some powerful changes and benefits for the nonprofit and tax-exempt retirement plan marketplace. As with many for-profit employers, nonprofit groups are continuing to analyze the recent retirement plan regulatory changes to determine how to best leverage them, but there are several key provisions that are generating buzz with this key client segment.
1.) The Pension-Linked Emergency Savings Account (PLESA) provision permits employers to provide plan participants with access to a portion of their retirement plan contributions for an unplanned financial need. This provision is optional for employers to provide and is available with 401(k), 403(b) or governmental 457(b) plans. PLESAs are available only to non-highly compensated employees (non-HCEs), are funded solely by employee salary deferral contributions, are made only as Roth (after-tax) contributions and cannot have account balances that exceed $2,500 (indexed for inflation). Additionally, a participant has full discretion when requesting a PLESA distribution and does not need to demonstrate or certify the financial need. This provision can help eliminate one of the barriers for employee participation in many non-profit retirement programs—the concern among many participants that they can’t easily access their funds in the event of unforeseen circumstances.
2.) The Automatic Enrollment provision requires certain retirement plans to include automatic enrollment and escalation features beginning in 2025. Although some previous retirement regulations encouraged the use of automatic enrollment by plan sponsors, recent legislation has gone a step further, making automatic enrollment and escalation features mandatory for retirement programs like 403(b) and 401(k) plans. The provision requires an initial deferral level of 3%, escalating by 1% per year until the deferral level reaches at least 10% (but not more than 15%). This feature is anticipated to greatly enhance plan participation, retirement saving levels and retirement readiness among nonprofit employees.
3.) Many employer retirement plans permit in-service withdrawals for participants with immediate financial need that cannot be met through other sources. These withdrawals are typically referred to as Hardship Withdrawals. Unlike the PLESA discussed earlier, hardship withdrawals are available specifically for immediate and heavy financial emergencies, with some of the safe harbor distribution reasons including medical care, principal residence purchase and educational expenses. 403(b) plans have had some restrictions on offering this type of withdrawal compared to other retirement plans (like 401(k)). Prior to the recent regulatory changes, hardship withdrawals from a 403(b) plan could only be taken from employee elective deferral contributions but now can include employer matching and non-elective contributions. This allows participants in 403(b) plans more potential access to their funds in the event of unforeseen circumstances.
4.) Recent retirement legislation now permits 403(b) plans to participate in Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs). These programs permit multiple plan sponsors to aggregate administrative, record-keeping, investment management and fiduciary services to potentially create a more cost-effective and simplistic retirement program for all the participating employers. Although MEP and PEP arrangements have been available for other retirement plan types (e.g., 401(k) plans), for some time now, 403(b) plans will also be permitted to utilize this unique plan structure.
Ultimately, nonprofit employers have the same goals as other employers to attract and retain key employees, while also providing a vehicle for retirement savings. Recent retirement legislation has also provided an opportunity for nonprofit groups to enhance their retirement programs to more closely align with retirement plans often used by for-profit employers. As we go through the rest of this year, nonprofit groups will continue to gain clarity with provisions created through recent legislation, along with how to best implement them to benefit their employees.
Nonprofit groups should consult with a tax or legal advisor before establishing a new retirement plan or implementing changes to an existing retirement plan and should consider speaking with a financial advisor for questions related to the impact of recent legislation on employer retirement plans.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards & Co. is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.