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Expanded Coverage For Part-Time Employees Under Secure 2.0

The SECURE 2.0 Act was signed into law in December 2022, and it expands the requirement to cover long-term part-time (LTPT) workers in 401(k) plans and ERISA-covered 403(b) plans to start in 2025.

Background – SECURE Act and Earlier

ERISA and Internal Revenue Code §410(a) restrict the maximum age and service requirements for eligibility to make 401(k) employee elective deferrals to age 21 and a year of service respectively. A plan may require up to 1,000 hours in a 12-month period to attain a year of service. Adoption of the maximum one year of service requirement can result in the exclusion from the plan of part-time workers who may have long periods of employment.

To address the lack of plan coverage for long-term part-time employees, the SECURE Act, enacted in 2019, provides that effective in 2021 employees who work three consecutive 12-month periods with at least 500 hours of service must be covered by a 401(k) plan’s elective deferral arrangement. For this purpose, hours must be counted starting in 2021, meaning the earliest a long-term part-time employee would enter a plan under these provisions would be January 1, 2024. A plan can still impose an age requirement (up to age 21). No matching or other employer contributions need to be made, and these LTPT employees can be excluded from non-discrimination testing such as ADP/ACP, 410(b) and top heavy testing.

SECURE 2.0 Clarifies Exclusion of Pre-2021 Service and Top Heavy Exception

Effective for 2024, SECURE 2.0 clarifies that pre-2021 service is not taken into account for vesting purposes. IRS Notice 2020-68 interpreted the original SECURE Act to require plans to take into account pre-2021 service for vesting purposes, but SECURE 2.0 amends the law to reverse this rule.

Also effective for 2024, SECURE 2.0 amends the top heavy rules to clarify that a safe harbor 401(k) plan will not fail to qualify for the exemption from the top heavy contribution requirement merely because LTPT employees covered by the plan are not eligible for the employer’s safe harbor contributions.

SECURE 2.0 further expands coverage

SECURE 2.0 reduces the requirement to determine hours for long-term part-time employees from three consecutive years to two. The earliest an long-term part-time employee would enter a plan under this expanded provision would be 2025.

New ERISA and Internal Revenue Code provisions added as part of SECURE 2.0 apply the LTPT rules to ERISA-covered 403(b) plans effective for plan years beginning after December 31, 2024. While these rules usually will not impact 403(b) plans because they must already comply with the universal availability rule for their salary reduction arrangements, the new rules may be applicable when an exception to universal availability comes into play – for example, for employees who normally work less than 20 hours per week and for employees who are students. Guidance from the government would be helpful to confirm how the universal availability rule interacts with the LTPT rules.

Key Takeaways

Plan sponsors of 401(k) plans should track hours for part-time employees starting with plan years beginning in 2021 (in 2023 for ERISA-covered 403(b) plans) or consider using an equivalency if the hours are not available. Part-time employees will enter a 401(k) plan in the 2024 plan year based on the three-year requirement of the SECURE Act. For 2025 and later years they will enter the plan (whether a 401(k) or ERISA-covered 403(b) plan) based on the two-year requirement of the SECURE 2.0 Act. Plans that do not comply with these rules will be in violation of the qualification requirements of the Internal Revenue Code, and for periods after December 31, 2024, the corresponding ERISA rules. One way to comply with the new rules is to make all employees eligible for elective deferrals if they have at least 500 hours of service in an eligibility computation period – in essence, making one year of service equal to 500 hours instead of 1,000 for eligibility purposes.

Following the enactment of the LTPT rules under SECURE Act 1.0, practitioners expressed concern that there would be an increase in the number of participants who are eligible to, but might not, elect to participate in a plan on account of the LTPT rules and that result could carry unintended consequences – for example, more plans with fewer than 100 active participants being subject to the costly annual requirement to attach an auditor’s opinion to the Form 5500. For this reason, among others, the government has adopted a rule for defined contribution plan Form 5500 filers that will look at the number of participants/beneficiaries with account balances as of the beginning of the plan year instead of using all those eligible to participate when determining if they are eligible for small plan reporting options.

The LTPT changes require employers to maintain accurate payroll records, and providers to update their systems to treat LTPT employees appropriately for non-discrimination and reporting purposes. Please contact our attorneys if you have questions about complying with these requirements, and about any changes that need to be made to plan design, existing processes and systems.

Our attorneys can help you navigate this complex and evolving area of law. Please contact a Boutwell Fay attorney at for more information.


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