The U.S. Department of the Treasury and the IRS issued Notice 2024-73, providing guidance concerning LTPTEs in 403(b) retirement plans under the Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0) for plan years beginning after Dec. 31, 2024.The notice follows proposed regulations issued on Nov. 27, 2023, implementing SECURE 2.0 rules for LTPTEs under Section 401(k) retirement plans.
While SECURE 2.0 amended both Section 401(k) and Section 403(b) with respect to coverage for LTPTEs, the proposed regulations only address rules for providing coverage under Section 401(k) retirement plans. Therefore, the notice provides much-needed guidance on the participation of LTPTEs in 403(b) plans.
Background
Historically, qualified retirement plans could exclude part-time employees from participation if the employees did not complete 1,000 hours of service in a year. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0) reduced the service requirement and required Section 401(k) plans to expand eligibility for LTPTEs who completed 500 hours of service in each of three consecutive 12-month periods. SECURE 2.0 extended application of the LTPTE rules to Section 403(b) plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) and lowered the eligibility period from three years to two years effective for plan years beginning after Dec. 31, 2024.
Section 403(b) sets forth requirements applicable to contributions to a Section 403(b) plan made for employees who are performing services for a public school of a state or a local government, for employees of employers that are tax-exempt organizations under Section 501(c)(3), or for ministers described in Section 414(e)(5)(A). A Section 403(b) plan must satisfy the universal availability requirement with respect to elective deferrals. Under the universal availability requirement, all employees of the employer must be eligible to make elective deferrals if any employee has the right to do so, with certain limited exceptions.
Under Section 125 of SECURE 2.0, a LTPTE generally is an employee who is eligible to participate in a Section 403(b) plan by meeting both of the following criteria:
- The employee worked at least two consecutive 12-month periods during each of which the employee has at least 500 hours of service.
- The employee attained age 21 by the close of the second 12-month period.
Notice 2024-73
The notice provides guidance on the application of eligibility and nondiscrimination rules for LTPTEs in Section 403(b) plans that are subject to ERISA. The guidance is provided in a Q&A format with the following key takeaways:
- Generally, a Section 403(b) plan must provide the right to make elective deferrals (which allows an employee to make contributions to the plan under a salary reduction agreement) to qualified LTPTEs other than students who qualify as an LTPTE.
Crowe observation
The student employee exclusion is statutory and is based on a classification of employees rather than service or work schedules, and thus overrides the LTPTE qualification.
- Section 403(b) plans are allowed to exclude part-time employees who do not qualify as LTPTEs without violating the consistency requirements of the Section 403(b) regulations. Under the consistency requirements of Treasury Regulations Section 1.403(b)-5(b)(4)(i), a plan does not fail to satisfy the universal availability requirement merely because it excludes certain categories of employees as long as it does so uniformly.
- An employer with a Section 403(b) plan may exclude LTPTEs from determinations of whether nonelective and matching contributions satisfy nondiscrimination requirements. Thus, a Section 403(b) plan sponsor may exclude LTPTEs from actual contribution percentage (ACP) testing for employer matching contributions and may exclude LTPTEs from receiving safe harbor employer matching contributions under an ACP safe harbor Section 403(b) plan.
- If an LTPTE becomes eligible to participate in the plan for reasons other than the LTPTE eligibility rules, the employee no longer can be excluded from receiving employer nonelective or matching contributions and must be included in nondiscrimination and coverage testing that applies to employer contributions.
The notice also provides that Section 403(b) plans that are not subject to Title I of ERISA (for example, governmental or nonelecting church plans) are not subject to the LTPTE rules.
Comments on the notice are due by Dec. 20, 2024. The notice also states that proposed Section 403(b) LTPTE regulations and final Section 401(k) LTPTE regulations should be similar and requests comments on whether any of the rules for LTPTEs under Section 403(b) plans should be different.
In addition, the notice provides that final regulations for LTPTEs participating in Section 401(k) plans will apply no earlier than plan years beginning on or after Jan. 1, 2026.
Looking ahead
Plan sponsors should consult with their advisers now to incorporate the required LTPTE provisions into the administration of their Section 401(k) and Section 403(b) plans. Employers should not wait for final regulations. The delay in the applicability date for the Section 401(k) regulations and the lack of regulations under Section 403(b) does not delay the effective date of the LTPTE provisions of SECURE 2.0, which are effective for plan years beginning after Dec. 31, 2024.
