Helping to SECURE Governmental 457(b) Participants’ Retirement Savings

The SECURE 2.0 Act of 2022 (SECURE 2.0) redefined when a participant in a governmental 457(b) plan may enter into an agreement to participate in that plan. The change is optional, but has the benefit of both easing the administrative burden of governmental employers and enabling participants to begin saving for retirement earlier.

Background

In order to defer into a governmental 457(b) plan, a participant must enter into a participation agreement with the governmental employer sponsoring that 457(b) plan. Prior to SECURE 2.0, a participant’s election to defer into the plan needed to be entered into in the calendar month prior to the calendar month in which compensation would be paid. This was known as the “first day of the month” requirement.

SECURE 2.0 Simplification

SECURE 2.0 modified that “first day of the month” rule. As of 2023, a 457(b) deferral agreement between a participant and a governmental employer may be effective with respect to compensation not yet paid or made available—in other words, a deferral agreement would be effective immediately rather than in the next calendar month.

This may appeal to a governmental employer because:

• It removes the administrative burden of a governmental employer’s payroll department having to pend signed participation agreements until the next calendar month.
• The effective date of salary reduction agreements can now be uniform and take a “one size fits all” approach, regardless of whether the deferral agreement is for a 401(k), 403(b) or governmental 457(b) plan. If a governmental employer offers more than one type of plan with a deferral feature, this would create a common protocol for the employer’s payroll and human resource personnel and eliminate the need to explain the difference between Internal Revenue Code deferral rules applicable to each plan type.

Plan participants also benefit from such a change because:

• Participation in their governmental employer’s 457(b) plan would be as soon as administratively feasible, minimizing the lag in starting to save for retirement.
• Having a “one size fits all” rule for the effective date of deferral agreements simplifies the participant experience if their governmental employer offers a 401(k) or 403(b) plan in addition to the 457(b) plan.

Best Practices

A governmental employer looking to simplify its 457(b) plan administration by eliminating the “first day of the month” rule for participation agreements should:

1. Update the 457 deferral agreement to provide for an effective compensation deferral date that is as soon as administratively feasible, and, if applicable, enrollment materials.
2. Update payroll and human resources procedures to reflect the new participation agreement rules.
3. Amend the 457 plan document to reflect the effective date of participant elections to make or change deferrals under the plan. Under current Internal Revenue Service guidance, a governmental employer must amend its 457(b) plan document for SECURE 2.0 no later than the end of the 2029 calendar year.

Used by permission. 

Linda Segal Blinn is Assistant Vice President of Voya’s Technical Services for the Tax Exempt Markets. She is a member of the NTSA Professional Education Committee and is a contributing author of The 403(b) Answer Book.