The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0) and the SECURE 2.0 Act of 2022 (SECURE 2.0) made significant changes to the rules for retirement plans. One of the more significant rule changes was the requirement under SECURE 1.0 for employers to allow LTPTEs to participate in an organization’s 401(k) plan after three years of part-time service, generally effective for plan years beginning after Dec. 31, 2023. Effective for plan years beginning after Dec. 31, 2024, SECURE 2.0 reduces the eligibility period for these employees from three years to two years and expands the rules to also apply to Employee Retirement Income Security Act of 1974 (ERISA) 403(b) plans. Prior to these changes, employers were not required to allow part-time employees to participate in retirement plans. On Nov. 27, 2023, the U.S. Department of the Treasury and the IRS issued proposed regulations regarding the application of these new rules to 401(k) plans. Taxpayers still are awaiting guidance on part-time employee participation under ERISA 403(b) plans.
Long-term, part-time employees
Under the proposed regulations, an LTPTE generally is defined as an employee who is eligible to participate in a 401(k) plan solely by reason of meeting all the following criteria:
- The employee completed two consecutive 12-month periods (three for plan years beginning in 2024).
- During each of those years, the employee was credited with at least 500 hours of service.
- The employee attained age 21 by the close of the second (or third in the case of plan years beginning in 2024) 12-month period.
An employee who would be eligible absent the LTPTE rules, such as an employee eligible under a plan that does not impose an hours-of-service eligibility requirement, is not an LTPTE.
Note that generally it is still permissible to exclude a class of employees from participating in a 401(k) plan if the excluded class is not a proxy for imposing an impermissible age or service requirement. For example, part-time employees cannot be excluded as a class, but job classifications based on criteria other than hours of service (for instance, classification as a doctor, nurse, clerk, secretary, or attorney) can be excluded if applicable coverage requirements are satisfied. Employees who belong to a properly excluded class may be excluded without violating the LTPTE rules even if the LTPTE rules otherwise would cause them to be eligible.
Other highlights of the proposed regulations
Some other highlights of the proposed regulations include the following:
- Although plans may allow LTPTEs to make Roth 401(k) contributions and age-50 catch-up contributions, they are not required to do so.
- Although LTPTE rules require that LTPTEs be allowed to make 401(k) contributions, there is no requirement that employers make matching or nonelective contributions on their behalf.
- LTPTEs must receive vesting credit based on years during which they have at least 500 hours of service, rather than the 1,000 hours of service required for other employees. These vesting rules continue to apply to an individual who ceases to be an LTPTE (for instance, because the employee earns 1,000 hours of service in a particular year or because the plan is changed to provide for immediate eligibility with no hours-of-service requirement) and apply to all current and future employer contributions (if any). These vesting rules do not apply to years beginning before Jan. 1, 2021.
- LTPTEs may be excluded from applicable discrimination and coverage testing.
- LTPTE account balances are included in the determination of whether a plan is top heavy. (A top-heavy plan generally is a plan where the account balances of key employees are greater than 60% of the account balances of all plan participants.) However, top-heavy minimum contributions are not required to be made on behalf of LTPTEs, and top-heavy vesting schedules are not required to apply to LTPTEs under a top-heavy plan. In addition, the exclusion of LTPTEs from safe harbor contributions does not cause a safe harbor plan to lose its top-heavy exemption. (A safe harbor plan generally is a plan that makes minimum contributions on behalf of plan participants, uses a favorable vesting schedule, and provides required participant notifications to avoid certain discrimination testing.)
Effective date of the proposed regulations
The proposed regulations apply to plan years beginning on or after Jan. 1, 2024, and may be relied upon until further guidance is issued. Comments on the proposed regulations are due by Jan. 26, 2024, and a hearing is scheduled for March 15, 2024.Industry groups have requested administrative relief because the short period of time between the issuance of the proposed regulations and the Jan. 1, 2024, effective date did not provide plan sponsors with sufficient time to analyze the new rules and make any desired changes to plan design.
Crowe observation
Given that the rules are proposed to be effective for 2024, it is likely Treasury and the IRS plan to finalize these rules quickly after the public hearing.
Looking ahead
Plan sponsors should work with their advisers to incorporate the required LTPTE provisions into the administration of their 401(k) plans. Even though guidance has not been issued covering ERISA 403(b) plans, sponsors of these plans also should consult with their advisers to discuss how the SECURE 2.0 changes affect them.
