On November 27, 2023, the IRS released proposed regulations addressing the new rules for long-term, part-time employees (“LTPTEs”) under tax-qualified retirement plans, including 401(k) plans. The new rules were introduced as part of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). and were expanded in 2022 by the SECURE 2.0 Act (SECURE 2.0).
Generally stated, effective for taxable years beginning after December 31, 2020, the SECURE Act requires plans to permit eligible employees who complete at least three consecutive 12-month periods of service, in which they complete more than 500 hours of service in each of the 12-month periods, to contribute to the plan. The SECURE 2.0 Act generally reduces the three-year period to two years, generally effective for plan years beginning after December 31, 2024.
Effective Date of Proposed Regulations
The proposed regulations themselves are set to become effective for plan years beginning on and after January 1, 2024 – a fact which has caused some consternation (but so far, no relief) in the employee benefits community. Because the text of the proposed regulations “permits” plan sponsors to rely on them (as opposed to adhering to a “good faith” reliance on the statutory language), the proposed rules are effectively mandatory.
Highlights of Proposed Regulations:
- A LTPTE is defined as an employee who is eligible to participate in the plan solely due to:
- For plan years beginning on and after December 31, 2020, completion of three consecutive 12-month periods during which the employee is credited with at least 500 hours of service;
- For plan years beginning on and after December 31, 2024, two consecutive 12-month periods during which the employee is credited with at least 500 hours of service; and
- The LTPTE must have attained age 21 by the end of the applicable consecutive 12-month periods.
LTPTEs must be permitted to make elective deferrals under the same rules and conditions that apply to other eligible employees. Notably, the proposed regulations do not require plans to provide LTPTEs with employer matching or nonelective contributions (though employers may choose to do so).
The proposed regulations provide that an LTPTE is eligible to make catch-up contributions for a taxable year, so long as the employee attains 50 before the end of that year. LTPTEs also may be permitted to make Roth contributions (assuming the plan permits them).
LTPTEs, like all other participants, are always 100% vested in the amount of their elective deferrals. If the plan chooses to provide LTPTEs with matching and/or nonelective contributions, special vesting rules apply; for example:
- LTPTEs generally obtain a year of vesting service for each 12-month period during which they are credited with at least 500 hours of service; and
- Plan years prior to January 1, 2021 may be disregarded.
Employers may generally formally elect to exclude LTPTEs from the otherwise applicable annual nondiscrimination testing requirements, including minimum coverage testing, ADP and ACP testing, and top heavy testing.
Broadly stated, an employee’s initial 12-month period must be based on the employee’s date of hire, but subsequent 12-month periods may be determined by reference to the first day of the plan year.
Although formal plan amendments are not required until the last day of the 2025 plan year, 401(k) plans must begin operating in compliance with the new rules as set forth in the proposed regulations as of the first day of 2024.
Of particular note, employers should review employment records going back to January 1, 2021 in order to identify all LTPTEs subject to the new rules. Affected individuals should be notified about the new rules and provided with information about the plan, including instructions as to how to make elective deferrals.
NOTE: The above general overview is not intended to fully list or extensively discuss the details of all of the provisions contained in the proposed regulations, which are lengthy and highly detailed. Your plan could be affected by a provision in the proposed regulations not listed or discussed in this blog. As always, plan sponsors and administrators are advised to consult with their own ERISA counsel or other professional advisor for full details, or to address specific questions concerning how the new rules affect their 401(k) plans.