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The Long-Term Part-Time Rule and 403(b) Plans: Unintended Consequences or Intentional Transformation

One of the stated objectives of the SECURE 2.0 Act of 2022 (‘the Act”) is to expand the coverage of retirement plans and to increase retirement savings. Among the many provisions passed to achieve that goal is section 125 of the Act, “Improving Coverage for Part-Time Worker"’.


By way of background, the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) required 401(k) plans to allow employees to contribute elective deferrals to the plan if the employee completed three years of service during each of which the employee worked for at least 500 hours (the “Long-Term Part-Time Rule”). The Act extended this requirement to 403(b) plans that are subject to ERISA, effective for plan years beginning after December 31, 2024. The Act also reduced the number of years of service required for participation to two years, for both 403(b) and 401(k) plans.


Unlike 401(k) plans, 403(b) plans already must allow most employees of the plan sponsor to contribute elective deferrals. This is the universal availability rule. There are a few exclusions to this rule, notably, certain student employees who are performing services to the school and are enrolled and attending classes, and employees who normally work fewer than 20 hours per week (“part-time employees”, defined by the IRS generally as working 1,000 hours in a year). Under the law prior to the Act, if an employee is a student who qualifies for the student exclusion or is a part-time employee, the plan is not required to allow them to contribute elective deferrals. Both exceptions are subject to the conditions under section 410(b)(4), meaning that the exclusion must cover all employees in these categories.


The amendments enacted by section 125 of the Act have brought the continued viability of those exceptions into question. With respect to the student exclusion, section 125, read strictly, appears to impose the long-term part-time rule as a condition for excluding students. In other words, under this interpretation, a student who works enough hours to meet the requirements of the long-term part-time rule can no longer be excluded from eligibility to contribute elective deferrals under the student exclusion. This means that employers who previously excluded students for purposes of universal availability will not be able to do so if the students qualify as long-term part-time employees.


Similarly, the part-time employee exclusion from universal availability appears to have been subsumed by the long-term part-time rule. The Act superimposes the long-term part-time rule on the part-time employee exclusion and requires the plan to determine whether part-time employees are not just providing 1,000 hours of services in a year, but if they have provided 500 hours of services for any two consecutive years. The long-term part-time rule will cause many employees who were previously excluded under the part-time employee exclusion to be included in the plan.


It is not clear if Congress intended to apply the amendment to student employees in this way and to convert what previously had been a classification exclusion into a service requirement. It is also not clear whether the drafters intended to impose a new requirement for universal availability in applying the long-term part-time rule, given that the Act left intact the original part-time employee exclusion. The universal availability requirement by its terms already serves to set a low bar for 403(b) plan participation. And we are not yet sure whether the IRS will read these sections of the Act as compelling these results.

We are hopeful that the IRS will provide additional guidance on these provisions with sufficient time before the deadline so that plans will know how to proceed. If the statute needs to be amended to restore the previous exclusions, it will require action by Congress. In the meantime, a sponsor of a 403(b) plan that has in the past excluded students and/or part-time employees might want to start putting systems in place for tracking the hours of these classes of employees if it is not doing so already. Alternatively, if feasible, plans could consider whether it makes sense to drop these exclusions entirely and simply let all employees contribute elective deferrals.


If you have any questions on this topic, contact your Boutwell Fay attorney or email us at attorneys@boutwellfay.com.

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