In the half-year since late December 2022, there have been many news reports, articles, and expert commentary about the significant changes made to 401(k), 403(b), and other tax-qualified Retirement Plans because of the law referred to as SECURE 2.0. These changes supplemented the changes that were included in The SECURE Act, now often referred to as SECURE 1.0, which became law in late December 2019.
Among the points of emphasis in SECURE 1.0 and SECURE 2.0 is increasing employee access to 401(k), 403(b), and other employer-maintained Retirement Plans. One way the law intends to increase access is by requiring that certain “long-term, part-time” (LTPT) employees be able to make their own payroll deducted contributions to their employer’s 401(k) or 403(b) Plan. While employers must allow certain LTPT employees to defer into the Plan, no changes to eligibility requirements for any employer contributions or full entry into the Plan are required – for example, a 401(k) Plan can continue to have a standard eligibility requirement that requires up to a one year waiting period with 1,000 hours of service for employer contributions and full entry into the Plan. In other words, the Plan’s otherwise applicable eligibility terms and conditions need to be satisfied before any LTPT employee is entitled to anything other than employee contributions.
The new limited eligibility rules only apply to a certain subset of LTPT employees and are being phased in over the next few years. First, generally beginning January 1, 2024, 401(k) Plans must permit an employee to contribute to the Plan if the employee has worked at least 500 hours per year with the employer for at least three consecutive years and has met the legally permitted minimum age requirement of 21 years old by the end of the three-consecutive-year period. Years before 2021 are disregarded for purposes of determining eligibility for LTPT employees.
Two important changes were made by SECURE 2.0, which broaden the LTPT coverage rule effectively beginning in 2025. First, the consecutive years with at least 500 hours per year is reduced from three years to two. However, under the two consecutive year standard, years before 2023 are disregarded. As such, the earliest that any LTPT employee with two consecutive years, but not three consecutive years, can be eligible to contribute is January 1, 2025. Second, the LTPT eligibility rules apply to 403(b) Plans that are subject to ERISA, beginning in 2025, in addition to 401(k) Plans.
The inclusion of LTPT employees should not adversely impact the ability of Plans to satisfy IRS compliance requirements – employers may elect to exclude LTPT employees from the IRS nondiscrimination testing and coverage testing rules, and from the top-heavy vesting and benefit rules.
IRS guidance regarding the LTPT rules has been long anticipated. However, the IRS recently indicated that guidance is not expected to be issued until December 2023.
Nevertheless, we believe it is important for employers to begin to evaluate which employees may be LTPT employees who are eligible to contribute in 2024 and, eventually, under the relaxed rules for 2025. Planning should begin regarding the eventual enrollment process for LTPT employees. Also, the pros-and-cons of relaxing eligibility requirements for all aspects of the Plan may be something to consider.
Please contact ACSI (www.acsi-ny.com) to learn more about the LTPT requirements, or how ACSI can help you identify LTPT employees for your Plan.