Under the SECURE Act and the SECURE 2.0 Act, employers must provide long-term, part-time employees the opportunity to make elective deferrals under their 401(k) plans and, beginning in 2025, their 403(b) plans. This new rule is fraught with complexity and has generated numerous questions about how the requirements apply. But in talking about the new rule, we often do so in simpler terms by focusing on the anticipated impact on employees working more than 500 hours (often thought of as the new eligibility threshold) but less than 1,000 hours (often thought of as the old eligibility threshold).

For the most part, that’s fine. In fact, doing so provides a helpful and, in some cases, necessary shorthand for discussing the primary differences between the long-understood old eligibility rule and the more complicated new one. However, because certain special rules apply to employees who enter an employer’s plan as long-term, part-time employees, it is important for all employers to understand when an employee is a long-term, part-time employee.

IN DEPTH

The recently proposed regulations issued by the Internal Revenue Service answer the question of who is a long-term, part-time employee in some detail. Those proposed regulations explain that an employee will be a long-term, part-time employee only if the employee becomes eligible to make elective deferrals under a plan solely as a result of completing at least 500 hours of service in three consecutive years (reduced to two years in 2025) and reaching age 21 by the end of that period. Put another way, an employee who might otherwise qualify as a long-term, part-time employee by meeting the minimum service requirements will not be considered one if the employee enters the plan after first satisfying other minimum eligibility criteria.

This may seem like an odd distinction, but it is a distinction that makes a meaningful difference in how employees are treated under the rule. This is in part because the new long-term, part-time employee rule does not actually eliminate the old eligibility rule under which employers were required to allow employees to enter their plans after completing at least 1,000 hours of service in a designated 12-month period. Instead, the new rule is integrated with that requirement, such that an employee must be allowed to enter the plan—at least for purposes of making elective deferrals—on the earlier of the date the employee first satisfies either the old 1,000-hour-eligibility rule or the new 500-hour-eligibility rule.

Importantly, if an employee enters a plan under the old rule, then the employee will not be considered a long-term, part-time employee. This is because even though working 1,000 hours per year may necessarily result in the employee also satisfying the lesser 500-hour requirement in consecutive years, the employee will not enter the plan solely because the employee satisfied the new long-term, part-time employee rule. For similar reasons, no employee would be considered a long-term, part-time employee under a plan that provides immediate entry for all employees, even if some of those employees might also complete 500 hours of service in several consecutive years. The same is true of other plans that include shorter waiting periods for plan entry.

Understanding this distinction is important because long-term, part-time employees are subject to special vesting, nondiscrimination testing, top-heavy vesting and benefit rules that do not apply to other employees. Of course, this begs the question: If employees are only long-term, part-time employees if they enter the plan in a certain way (i.e., because they worked on a very part-time basis for their employers in consecutive years), do they ever cease to be treated that way if, for example, they start to work more?