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Diving Into SECURE 2.0: IRS Issues Guidance to Expand Access to 401(k) Savings for Long-Term Part-Time Employees
Wednesday, February 21, 2024

In our prior SECURE 2.0 articles, we have discussed student loans and 401(k) plan matching contributionschanges designed to simplify plan administrationchanges to the minimum required distribution rules, and changes for small employer plans. In this article, we discuss the proposed regulations that were recently published, covering SECURE 2.0’s expanded access to 401(k) plan savings for certain long-term part-time employees.

We previously described the expansion of 401(k) plan access for certain long-term part-time employees in the February 19, 2020, December 30, 2022, and July 19, 2023 articles. To refresh, under the SECURE Act 2019 (SECURE 1.0), 401(k) plan sponsors must allow employees who complete 500 hours of service in each of three consecutive years to begin making elective deferrals starting in 2024. Effective for plan years beginning in 2025, SECURE 2.0 changed that requirement from three to two consecutive years of 500 hours of service. As a practical matter, plans that permit employees to make elective deferrals as soon as administratively practicable after the employee’s commencement date are exempt from these rules.

Late in 2023, the Internal Revenue Service (IRS) issued proposed regulations that provide much-anticipated guidance relating to LTPTEs. We discuss a few areas below.

Defining “Long-Term Part-Time Employee” and Eligibility Requirements

As noted above, 401(k) plan sponsors must allow certain long-term part-time employees to begin making elective deferrals starting in 2024. The IRS defines the term “long-term part-time employee” (LTPTE) as an employee who –

  • Completes at least 500 hours of service in each of three consecutive 12-month periods, effective for the 2024 plan year (or two consecutive 12-month periods effective for the 2025 plan year), and
  • Has attained age 21 by the end of those applicable 12-month periods.[1]

In other words, the proposed regulations apply to employees who are eligible to make elective deferrals solely by reason of being a LTPTE. The IRS clarifies that an employee who becomes eligible to participate in a 401(k) plan by completing “any other service requirement” is not a LTPTE.

An employee is no longer a LTPTE when they subsequently complete 1,000 hours of service during a plan year (or other relevant 12-month measurement period specified by the 401(k) plan) or fail to satisfy the plan’s eligibility conditions (other than age or service conditions) (a Former LTPTE). For example, if the employee transfers to a position that is an ineligible job classification (assuming it is not a proxy for age or service conditions as discussed below), then the employee is no longer a LTPTE. As another example, if an employee completes 1,000 hours of service during the plan’s relevant 12-month period, then they cease to be considered a LTPTE and become a regular participant, who may be eligible for employer contributions.

Determining the 12-Month Period and Participation Entry Date

Similar to the historic rules applicable to counting 1,000 hours of service during a 12-month period, an employer may measure the relevant 12-month periods either:

  • Based on the anniversary of the employee’s hire date. (If a plan utilizes this method, 12-month periods beginning prior to January 1, 2021, do not have to be considered.) For example, if an employee was hired on May 1, 2021, and completed 500 hours of service during each of the periods from May 2021-April 2022, May 2022-April 2023, and May 2023-April 2024, then the employee would be considered a LTPTE as of the end of April 2024.
  • Based on a combination of the anniversary of the employee’s hire date and plan years thereafter. Under this method, the first 12-month measurement period ends with the anniversary of the employee’s hire date, and then subsequent 12-month periods coincide with the plan year, starting with the first plan year after the employee’s hire date. Again, 12-month periods beginning prior to January 1, 2021, do not have to be considered. For example, if an employee was hired on May 1, 2021, and completed 500 hours of service by April 30, 2022, and completed 500 hours during each of the 2022 and 2023 plan years, then the employee would be considered a LTPTE as of the end of December 2023.

Under the proposed regulations, a LTPTE’s entry date for making elective deferrals cannot be later than the earlier of –

  • The 6-month anniversary of the day the employee becomes a LTPTE, or
  • The first day of the plan year beginning after the date the employee becomes a LTPTE.

Rehired LTPTEs

If a LTPTE terminates employment – whether before or after their entry date for making elective deferrals – they will be considered a LTPTE if later rehired. If rehired after what would have been their entry date, the LTPTE must be immediately eligible to make elective deferrals as of the hire date.

Job Classification Exclusions

The proposed regulations do not require a plan sponsor to allow every LTPTE to participate in the plan. Similar to the historic rules applicable to retirement plans, plan sponsors may continue to exclude employees based upon bona fide job classifications, provided that such exclusion cannot be a proxy for excluding employees based on their age or service.

Plans Utilizing Elapsed Time Method

Plans utilizing the elapsed time method to determine service for eligibility purposes do not consider the actual completion of a certain number of service hours. Consequently, employees who become eligible to make elective deferrals under the elapsed time method will not be considered LTPTEs under the proposed regulations.

Employer Contributions and Vesting Service

The IRS confirms that 401(k) plan sponsors are not required to make matching or nonelective contributions for LTPTEs, even if they are made with respect to participants who became eligible under other eligibility terms of the plan and even if made under a safe harbor 401(k) plan (other than a SIMPLE 401(k) plan). However, if a LTPTE becomes a “regular” participant, such as by completing 1,000 hours of service during a plan year, then they become eligible for employer contributions.

With respect to vesting service, LTPTEs must be credited with a year of vesting service for each 12-month period in which they are credited with at least 500 hours of service (which is more favorable than the 1,000 hours of service requirement commonly used by 401(k) plans). Importantly, this more favorable vesting rule continues to apply to Former LTPTEs. Similar to the rules for determining 500 hours of service, as described above, 12-month periods prior to January 1, 2021, do not need to be considered.

Nondiscrimination and Coverage Testing

Under the proposed regulations, 401(k) plan sponsors may elect to exclude all (but not some) LTPTEs for nondiscrimination and coverage testing purposes and top-heavy benefits, although LTPTEs must be counted in the top-heavy test.

With respect to safe harbor plans, there must be conforming plan language (e.g., a plan amendment) to make the election effective.

With respect to non-safe harbor plans, the proposed regulations are clear that the plan document must exclude LTPTEs from receiving top-heavy benefits, and must include “enabling” language if the employer wishes to exclude LTPTEs from nondiscrimination and coverage testing.

What to Do Now?

Rely and amend. Although the proposed regulations are indeed proposed, they provide keen insight into the IRS’s thinking regarding LTPTEs. Until the regulations are finalized, sponsors of 401(k) plans may rely on the proposed regulations for plan years beginning on or after January 1, 2024. As is generally the case for other SECURE 1.0 and 2.0 required amendments, plan documents must be amended by the end of 2026.

Consider including LTPTEs for administrative ease. Plan sponsors should consider whether to make LTPTEs eligible for employer contributions due to administrative reasons. For example, an employer may decide that its payroll systems are not designed to easily include the LTPTE group for employee contributions, while excluding them from employer contributions.

Confirm and communicate. By now, 401(k) plan sponsors should be comfortable that employment records and payroll systems are accurately tracking service for part-time employees and LTPTEs are being timely notified of their eligibility to make elective deferrals. If not, now is the time to confirm that all administrative processes are working properly and remedied if necessary.

Check participant communications. Review summary plan descriptions and other participant communications to ensure that the LTPTE rules are accurately reflected and communicated.


[1] Under the proposed regulations, employees covered by a collective bargaining agreement in which retirement benefits were the subject of good faith bargaining and nonresident aliens who do not receive U.S. source income are excluded from the LTPTE definition.

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