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IRS proposes long-term, part-time employee rules for 401(k) plans

By Stephen Douglas , Rob Haffner and William “Bill” Kalten | January 19, 2024

The IRS proposes guidance on changes brought on by the SECURE Act as they relate to 401(k) plans.
Benefits Administration and Outsourcing Solutions|Health and Benefits|Retirement

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, 401(k) plan sponsors must allow an employee to make elective deferrals if the employee works at least 500 hours per year for three consecutive years (later changed to two in SECURE 2.0) and attains age 21 by the end of the three-year (later two-year) period. SECURE 2.0 made additional changes, including applying similar rules to ERISA-covered 403(b) plans. The IRS has recently issued proposed regulations that provide guidance on these law changes as they relate to 401(k) plans. The proposed regulations do not address 403(b) plans.

Employers should be aware of the guidance and determine if administrative changes are needed in light of the proposed regulations.


For plan years beginning after December 31, 2020, except for collectively bargained plans, SECURE 1.0 requires employer 401(k) plans to allow employees to become eligible to participate in the plan upon meeting either of the following requirements:

  1. The completion of one year of service (applying the 1,000-hour rule) or age 21 (if later)
  2. The completion of three consecutive years of service where the employee completes at least 500 hours of service in each of those years and has attained age 21 by the end of such period

For eligibility purposes, 12-month periods beginning before January 1, 2021, are not taken into account. As a result, long-term, part-time (LTPT) employees in calendar-year plans are generally not required to become eligible before 2024.

Also, for plans that make employer contributions on behalf of employees who are eligible solely by reason of the LTPT rule, each 12-month period for which the employee has at least 500 hours of service must be treated as a year of service for vesting purposes. SECURE 1.0 required that 12-month periods beginning before 2021 must be taken into account for purposes of the new special vesting rule.

SECURE 2.0 amended the eligibility requirements, beginning in 2025, to require coverage for employees who have worked at least 500 hours for an employer for two (instead of three) consecutive years. SECURE 2.0 also expanded the LTPT rules to ERISA-covered 403(b) plans but allows these types of plans to disregard eligibility service before 2023, changed the special vesting rules for LTPT employees so that 12-month periods beginning before 2021 (for 401[k] plans) and 2023 (for 403[b] plans) may be disregarded with respect to LTPT employees, and made several additional clarifying changes.

Employers are permitted to exclude LTPT employees from coverage testing, Actual Deferral Percentage and Actual Contribution Percentage testing, and the top-heavy vesting and benefit requirements; however, this relief ceases to apply to any employee who satisfies the age and service requirements that apply under the plan to full-time employees.

Proposed regulations

The proposed regulations would, among other things:

  • Clearly define the term “long-term, part-time employee”
  • Explain how the various service crediting methods and entry date rules work with respect to LTPT employees
  • Provide guidance on the nondiscrimination testing exclusions that are available with respect to LTPT employees and on what happens when an LTPT employee meets the regular plan eligibility requirements (i.e., works more than 1,000 hours in a 12-month period)

Applicability dates and plan amendment deadlines

As currently drafted, the proposed regulations would apply to plan years that begin on or after January 1, 2024 — and plans may rely on them immediately. The IRS did not indicate that plans may rely on a good faith interpretation of the statute, which could mean that calendar-year plans must comply with the proposed regulations beginning on January 1, 2024.

Plan amendments are not required until the end of the 2025 plan year (2027 for collectively bargained and governmental plans), although plan operations must be compliant by the beginning of the 2024 plan year for 401(k) plans or the 2025 plan year for 403(b) plans. Note there is no exception for governmental plans or church plans, although the IRS requests comments on the application of these rules to those types of plans.

Going forward

Calendar-year plans would apparently need to be in operational compliance with the proposed regulations beginning January 1, 2024. Many employers may already be substantially in compliance (i.e., they have procedures in place to track hours and credit service that may require only minor adjustments to comply with the proposed rules). Other employers may not need to comply at all because they use elapsed time or simply permit all employees to make 401(k) contributions upon hire.

Employers will also need to update plan documents, summary plan descriptions and other plan communications (e.g., safe harbor notices and employee handbooks) to advise employees of these new rules.


Senior Director, Retirement and Executive Compensation

Director, Retirement

Senior Director, Retirement and Executive Compensation

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