Together, the SECURE Act and the SECURE 2.0 Act require employers to offer employees who work at least 500 hours within three (reduced to two beginning January 1, 2025) consecutive 12-month periods an opportunity to make elective deferrals to their 401(k) and, beginning in 2025, their 403(b) plans. In doing so, the new rule raises numerous questions about how the new service requirement should be tracked. This includes questions about what 12-consecutive month period (often referred to as a “computation period”) employers should use to determine if an employee has completed the requisite service to begin participating in the plan.

The recently proposed regulations released by the Internal Revenue Service (IRS) provide that answer by clarifying that employers can use one of two eligibility computation periods:

• A computation period based on the anniversary of an employee’s date of hire. Under the anniversary method, the employer tracks how many hours the employee works starting on the employee’s date of hire or rehire and ending on the anniversary of that date each year.
  • For example, assume an employee is hired on March 18, 2024. Under the anniversary method, the employee’s first eligibility computation period runs from March 18, 2024, through March 17, 2025. Then, the second eligibility computation period begins March 18, 2025, the day after the first computation period ends, and all subsequent eligibility computation periods start on the next March 18 (i.e., the anniversary of the employee’s date of hire).
• A computation period based on the plan year. Under the plan-year method, which is somewhat more common, the employer tracks how many hours the employee works starting on the employee’s date of hire or rehire through the first anniversary of that date. Then, the employer shifts its hours counting to a plan-year measurement period that runs from the first day of the plan year to the last day of the plan year. In other words, this method tracks hours in the same way as the anniversary-date-based computation period during an employee’s first year with the business before shifting to a uniform measurement period for all employees (the plan year). For many employers, the plan year coincides with the calendar year or, less frequently, their fiscal year.
  • For example, let’s again assume an employee is hired on March 18, 2024. Under the plan-year method, the employee’s first eligibility computation period also runs from March 18, 2024, through March 17, 2025. But the plan defines subsequent computation periods as the plan year (here, let’s further assume the plan year is the calendar year). This means the employee’s second eligibility computation period is the plan year beginning January 1, 2025, and ending December 31, 2025. In other words, for the period between January 1, 2025, through March 17, 2025, the first and second computation periods overlap, and any hours the employee is credited with during that overlapping period count toward satisfying a year of service for both computation periods. Following the 2025 plan year, it gets easier, as the employee’s future eligibility computation periods are simply consecutive, measured beginning on the first day of each succeeding plan year (i.e., beginning January 1, 2026, January 1, 2027, etc.)

If these methods for counting service sound familiar, there’s a reason for that. Although the new long-term, part-time employee rules necessitate numerous changes to how employers track service for their employees, this isn’t one of those changes. Instead, the eligibility computation period rules are the same rules employers have always used to track eligibility service under their plans. This means employers will not need to change their computation periods to comply with the new rules. However, they will need to track service over longer periods—i.e., over consecutive 12-month periods, rather than only over a single 12-month period—to satisfy the new rule, which will complicate service counting and tracking.

Therefore, it is important for employers to continue reviewing and refining their existing eligibility-tracking processes to confirm that hours are accurately aggregated over relevant periods to ensure timely plan entry. Most employers reviewed these processes some time ago in anticipation of the initial effective date of the new rule. Now that the rule is effective, though, it will be important to establish procedures for periodically reviewing eligibility data and test files to ensure that tracking systems are working as anticipated and, where that doesn’t occur, to timely correct any related errors. Given the added complexity around hours counting and tracking under the new rules, employers that have historically tracked hours and eligibility themselves may also want to talk with their human resources information system providers and recordkeepers to see if those providers offer additional services that might make tracking under the new rules easier.