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Proposed Regulations on Long-Term Part-Time Employee Participation in 401(k) Plans

Contributed by Katrina Veldkamp, Boutwell Fay LLP

February 2024

Retirement plan sponsors and service providers will want to pay close attention to proposed regulations issued by the Internal Revenue Service on Nov. 27, 2023, providing guidance with respect to long-term, part-time (LTPT) employees (Prop. Treas. Reg. § 1.401(k)-5 (88 Fed. Reg. 82796)).

The proposed regulations—which taxpayers may rely on until final regulations are issued—concern provisions relating to participation by LTPT employees in I.R.C. (Code) § 401(k) plans. These provisions were added to the Internal Revenue Code by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which was part of the Further Consolidated Appropriations Act, 2020, Public. Law No. 116-94, Div. O (Dec. 20, 2019). The SECURE 2.0 Act of 2022, which was signed into law on Dec. 29, 2022 as part of the Consolidated Appropriations Act, 2023 (Division T of Public Law No. 117-328), expanded on these provisions, including making them applicable to ERISA-covered Code § 403(b) plans and lowering the number of years needed for LTPT eligibility.

A cash or deferred arrangement must meet the requirements of the proposed regulations in order to satisfy the LTPT provisions in Code § 401(k)(2)(D). Note that the IRS has not yet provided regulations or other guidance regarding how the LTPT rules will apply for Code § 403(b) plans, including how they will interact with the Code § 403(b) universal availability requirements.

This article discusses the proposed regulations relating to Code § 401(k) and how they will affect plan sponsors and their service providers.

Definition of LTPT Employee

The proposed regulations define a LTPT employee as an employee who is eligible to participate in a cash or deferred arrangement solely by reason of having (i) completed two consecutive 12-month periods during which the employee is credited with at least 500 hours of service (three consecutive 12-month periods for a plan year beginning in 2024, to reflect the original provisions of the SECURE Act), and (ii) reached age 21 by the end of the last 12-month period. Collectively bargained employees and nonresident aliens with no U.S. source income do not qualify as LTPT employees.

An employee who becomes eligible for a plan for any other reason is not an LTPT employee. The regulations give numerous examples of situations in which an employee who does not work full-time is not an LTPT employee. If a plan has immediate eligibility, an employee who becomes eligible will not be an LTPT employee. The preamble and examples also clarify that a plan using elapsed time to determine eligibility service will be subject to the existing 1-year maximum on eligibility service, so an employee for whom elapsed time is used for eligibility will not be an LTPT employee because the employee would not be eligible for participation solely by reason of completing consecutive 12-month periods with at least 500 hours of service. Similarly, an employee who meets the minimum age and service conditions under Code § 410(a)(1) before satisfying the LTPT employee definition will not be an LTPT employee.

LTPT Employee Eligibility and Participation

The regulations permit plan sponsors to continue excluding employees based on bona fide job classifications, as long as they are not subterfuges to avoid age and service restrictions. If an employee is in an excluded class, that exclusion would trump the LTPT employee rules, even if the employee works the requisite number of hours. If such an employee later moves to an eligible class of employees, they would immediately become eligible. Note that employees excluded by class must be included in applicable nondiscrimination testing even if they would otherwise be an LTPT employee.

Practice Tip: This is an area in which guidance from the IRS on Code § 403(b) plans would be helpful, since Code § 403(b) allows for certain enumerated exceptions to the universal availability requirement. For example, plans are permitted to exclude employees who normally work fewer than 20 hours per week. Because that exclusion has the effect of imposing a service requirement, it would arguably not be a permitted exclusion for LTPT employee purposes if the proposed regulations are applied to Code § 403(b) plans. Sponsors of Code § 403(b) plans may want to keep track of hours for employees in excluded classifications for 2023 and 2024 in case those employees become eligible as LTPT employees in 2025.

To count a part-time employee's hours, a plan may use the general method of crediting service set forth in Code § 410(a)(3)(C) (cross-referencing DOL regulations at 29 C.F.R. § 2530.200b-2(a)), or may use an equivalency method to credit hours of service. The regulations do not change the number of hours that would otherwise be credited under an applicable equivalency method.

Practice Tip: Equivalencies are useful when plan sponsors do not have records of actual hours worked, such as for salaried employees, but may be used even if a plan sponsor does have such records. For example, the regulations permit plan sponsors to credit an employee with 10 hours of service for each day, or 45 hours of service for each week. Additional equivalency methods may also be available, so plan sponsors should consult their service providers and counsel to determine whether applying an hours equivalency for LTPT employees is practical for them.

Generally, all 12-month periods in which an employee is credited at least 500 hours of service must be taken into account to determine LTPT employee status. However, periods beginning before January 1, 2021, are not taken into account; the preamble to the regulations explains that this a mandatory requirement, and plan sponsors may not voluntarily credit additional service to employees for purposes of an LTPT employee determination. The 12-month periods are determined starting on the employee's date of hire, but a plan may switch the determination period to the plan year beginning within that initial 12-month period. If an employee works at least 500 hours in both the initial 12-month period and the overlapping second 12-month period (i.e., plan year), that will count as two years of service for the LTPT employee determination, even if some of the same hours are counted in both periods.

Practice Tip: Because the 12-month periods may overlap, some employees may become eligible as LTPT employees even before they have worked “long term.” For example, an employee hired Dec. 1, 2021, in a calendar year plan that switches the determination period to the plan year could become eligible Jan. 1, 2024, if they work at least 500 hours from Dec. 1, 2021–Nov. 30, 2022, Jan. 1, 2022–Dec. 31, 2022, and Jan. 1, 2023–Dec. 31, 2023. Similarly, an employee hired Dec. 1, 2023, could become eligible Jan. 1, 2025–after working barely more than a year–if they work at least 500 hours of service from Dec. 1, 2023–Nov. 30, 2024 and Jan. 1, 2024–Dec. 31, 2024.

Plan sponsors who wish to avoid LTPT employees entering a plan earlier than anticipated due to overlapping 12-month periods could choose to continue measuring 12-month periods by employees’ anniversary dates, although doing so could increase the administrative burden. Plan sponsors should consult with their service providers to determine the best method of counting service for their plans.

The regulations do not include any break in service provisions similar to the rules under Code § 410(a)(5), so once an employee becomes an LTPT employee, they will continue to be eligible even if they work fewer than 500 hours in subsequent years. If a former employee who was an LTPT employee is rehired, prior service is taken into account to determine if the rehired employee is eligible to participate as an LTPT employee.

Practice Tip: Upon rehire, it is important to differentiate between employees who were previously eligible for a plan due to being LTPT employees and employees who were eligible for any other reason. Non-LTPT employees who were previously eligible are generally immediate eligible upon rehire, but they are subject to the break in service rules; if their former eligibility service is disregarded due to those break in service rules, they may be subject to the LTPT employee rules after rehire.

The same entry date requirements as Code § 410(a)(4) apply, which means that the latest permissible entry dates for LTPT employees are semi-annual entry dates.


The regulations confirm that LTPT employees have special vesting provisions that will likely require separate tracking by plan sponsors and service providers. LTPT employees are credited with a year of vesting service for each 12-month period in which they are credited at least 500 hours. Periods of service prior to Jan. 1, 2021, or before the employee reaches age 18 are not required to be taken into account for vesting. Plans may use any 12-month determination period permitted under Code § 411(a).

The LTPT employee vesting provisions apply even after an employee has ceased to be an LTPT employee, such as by moving to a full-time position – the regulations refer to these employees as former LTPT employees. This means that plans with 1,000 hours of service requirements for vesting will have to apply a separate 500 hours of service schedule to former LTPT employees.

Former LTPT Employees

An employee who became eligible for a plan as an LTPT employee becomes a former LTPT employee as of the first day of the first plan year beginning after the earlier of the plan year in which the employee (i) is credited with 1,000 hours in an eligibility determination period, or (ii) ceases to satisfy the plan's eligibility conditions (other than age and service conditions), such as by moving to an ineligible class.

An employee who is a former LTPT employee because they ceased to satisfy the plan's eligibility conditions will return to LTPT employee status as of the first day of the plan year during which the employee again satisfies those conditions, although their ability to make deferrals will recommence on the day they satisfy the eligibility conditions (not retroactively to the beginning of the plan year).

Employee Deferrals

LTPT employees must be allowed to make pre-tax elective deferrals. The preamble to the regulations clarifies that plan sponsors may allow LTPT employees to make catch-up contributions once they reach age 50. LTPT employees may also be permitted to make Roth contributions if the plan so allows. Both catch-up contributions and Roth contributions are subject to nondiscrimination requirements under Code § 401(a)(4), but the preamble states that plan sponsors making an election to exclude LTPT employees for nondiscrimination purposes (see further discussion below) may disregard LTPT employees for purposes of determining whether the plan complies with those requirements.

Practice Tip: If a plan sponsor mistakenly did not provide LTPT employees eligible as of Jan. 1, 2024, the opportunity to defer on that date, the plan sponsor may need to take corrective action under the Employee Plans Compliance Resolution System (Rev. Proc. 2021-30; interim guidance provided in IRS Notice 2023-43). Generally, exclusion of an eligible employee from a plan requires a qualified nonelective contribution from the plan sponsor to make up for the missed deferrals, though the amount of the corrective contribution depends on how long the failure continues. The SECURE 2.0 Act permits self-correction of eligible inadvertent failures within a reasonable period of time after discovery. Plan sponsors should take steps now to identify any inadvertent failures to enroll eligible LTPT employees and contact their service providers and counsel to discuss correction options.

The regulations state that a plan may not put restrictions on deferrals by an LTPT employee that is a nonhighly compensated employee, except for restrictions otherwise allowed under the safe harbor rules under Treas. Reg. § 1.401(k)–3(c)(6) (e.g., reasonable limitation on frequency of election changes; limits on types of compensation that may be deferred, provided the compensation definition meets the requirements of Code § 414(s); maximum limit on amount of elective deferrals, provided employees can contribute an amount sufficient to max out any matching contributions under the plan).

Employer Contributions

Plan sponsors are not required to provide employer contributions to LTPT employees, including safe harbor contributions. If they do provide employer contributions to LTPT employees that are subject to a vesting schedule, the special vesting rules discussed above will apply. In a safe harbor plan, a plan sponsor may make non-safe harbor contributions to LTPT employees and not fail to be a safe harbor plan if the plan sponsor elects to exclude LTPT employees from nondiscrimination testing, as discussed below.

Nondiscrimination Testing and Top Heavy Elections

Plan sponsors are not required to include LTPT employees in nondiscrimination testing, including actual deferral percentage (ADP) testing under Code § 401(k)(3), ADP safe harbor provisions under Code § 401(k)(12) and § 401(k)((13), actual contribution percentage (ACP) testing under Code § 401(m)(2), ACP safe harbor provisions under Code § 401(m)(11) and § 401(m)(12), coverage testing under Code § 410(b), and general nondiscrimination testing under Code § 401(a)(4). Likewise, top heavy contributions and vesting under Code § 416 are not required for LTPT employees. However, SIMPLE 401(k) plans must take LTPT employees into account to satisfy the provisions of Code § 401(k)(11) or § 401(m)(10) and may not elect to exclude LTPT employees for that purpose.

In order to exclude LTPT employees from nondiscrimination testing, plan sponsors must elect to do so. The proposed regulations establish procedures for making such an election. Safe harbor plans must set forth the election in the plan document, while non-safe harbor plans can make a separate election outside the plan document, as long as the plan document has enabling language. An election to exclude LTPT employees for testing is all or nothing-–a plan sponsor cannot pick and choose from which tests it wants to exclude LTPT employees.

Plan sponsors must make a separate election to exclude LTPT employees from top heavy testing and benefits. That election must be in the plan document.

Practice Tip: The proposed regulations do not specify the language that must be included in the plan document for an election, or to enable an election, to exclude LTPT employees for nondiscrimination testing and/or top heavy purposes. The IRS recently issued the updated Listing of Required Modifications (LRMs) for defined contribution plans and cash or deferred arrangements, which provide suggested language for certain provisions of the SECURE 2.0 Act, but neither LRM includes specific language regarding the LTPT employee testing elections. Sample amendment language would be helpful.

Even if LTPT employees are excluded from testing, plan sponsors can still make employer contributions on their behalf.

If a plan does not exclude LTPT employees from testing, then LTPT employees will be considered otherwise excludable employees because they do not meet the statutory age and service requirements. Former LTPT employees who have completed 1,000 hours of service will no longer be otherwise excludable employees.


The proposed regulations provide welcome detail regarding the LTPT employee rules, but, given the lateness of their issue, plan sponsors and service providers are still working to implement the regulations. Plan sponsors should work with service providers to review plans and systems to ensure they are complying with the LTPT employee rules, if applicable, and to determine whether any plan amendments and/or separate elections related to nondiscrimination testing will be needed. The deadline for amending a nongovernmental or noncollectively bargained plan is Dec. 31, 2026, according to IRS Notice 2024-2. The IRS has scheduled a public hearing on the proposed regulations on March 15, 2024.

Copyright 2024 Bloomberg Industry Group, Inc. (800-372-1033) Proposed Regulations on Long-Term Part-Time Employee Participation in 401(k) Plans. Reproduced with permission.

Proposed Regulations on Long-Term Part-Time Employee Participation in 401(k) Plans
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