On November 24, 2023, the IRS released long-awaited guidance around the updated 401(k) eligibility requirements pertaining to long-term part-time employees (LTPT) under the SECURE 2.0 Act of 2022 (SECURE 2.0). These proposed regulations, if finalized, would amend the rules previously applicable to 401(k) plans and provide additional clarification for some of the questions plan sponsors have had since the enactment of the LTPT provisions under the SECURE Act and SECURE 2.0.
As background, under the SECURE Act, part-time employees working at least 500 hours for the plan sponsor over three consecutive years and attain age 21 must be permitted to contribute to a 401(k) plan. This requirement is applicable to plan years beginning after January 1, 2024. SECURE 2.0 expanded this requirement to shorten the applicable time period from three years to two years and extend the applicability to 403(b) plans effective January 1, 2025. 12-month periods beginning before January 1, 2021, are not taken into account for the purpose of tracking hours.
Summary of the Proposed Regulations:
- Applicable Employees: The proposed regulations state the LTPT rules are only applicable to employees who become eligible to participate in a qualified cash or deferred arrangement (CODA) solely by satisfying the aforementioned requirements, e.g., hours of service over applicable 12-month period. Further, the proposed rules clarify that LTPT employees who are collectively bargained or non-resident aliens with no U.S. source of income are excluded from these requirements.
- Tracking Hours: Plans that use either an hour equivalency method or the elapsed time method to determine eligibility for the plan can continue to do so. With respect to the elapsed time method, the proposed rules specifically state that a plan may not require an employee to complete more than one year of service under the elapsed time method to be eligible to participate in the plan. Employees who become eligible as a LTPT employee and later satisfy the plan’s regular eligibility requirements will cease to be treated as a LTPT employee.
- Plan Sponsor Contributions: Plan sponsors are not required to make non-elective and matching contributions on LTPT employees’ behalf, even if such contributions are made for other eligible employees participating in the plan.
- Nondiscrimination Testing: Plans are permitted to exclude LTPT employees when conducting the plan’s nondiscrimination and coverage testing. Plan sponsors opting to exclude these employees from testing must do so for all required tests the plan is subject to and must exclude all LTPT employees from testing.
The proposed rules allowed comments until January 26, 2024; however, plans and plan sponsors are expected to rely on the proposed rules prior to finalization or until additional guidance is released. Impacted parties should have taken steps to ensure compliance by January 1, 2024, which may have included outreach to payroll companies and/or 401(k) providers. If steps have not been taken to comply, plan sponsors should make the necessary adjustments expeditiously. Despite the 2024 effective date, plan amendments are not required until December 31, 2026.
