The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and 2022’s SECURE 2.0 brought about some of the most sweeping retirement-related legislative changes in years. Both were purposely crafted to 1) encourage employers to create and maintain retirement plans and 2) facilitate employees’ active participation in those plans.
Prior to the SECURE Act, employers could effectively exclude part-time employees who worked less than 1000 hours per year from participating in their 401(k) and 403(b) plans. The SECURE Act changed that by creating a new definition of employee: the long-term, part-time employee (LTPT). As originally defined, the LTPT is an employee who works more than 500 hours per year in 3 consecutive years and who does not otherwise meet plan eligibility. Beginning in 2024, the employer with the LTPT must permit the LTPT to defer pre-tax contributions into the employer’s 401(k) plan. The employer is not required to make an employer contribution – match or otherwise – to the LTPT. SECURE 2.0 reduced the consecutive years requirement to only 2 years and incorporated the 403(b) plan. Thus, beginning in 2025, the LTPT is an employee who worked at least 500 hours in the previous two consecutive years.
The IRS proposed rules in late November 2023 to help provide guidance to employers and their service providers. Highlights include:
- The employer can require the LTPT to be at least age 21
- The employer is not required to include employees who are otherwise excluded from plan participation (i.e. non-resident aliens, collectively bargained employees)
- The LTPT enters the Plan on an entry date available under the provisions of the Plan
- The employer is not obligated to provide an employer contribution to the LTPT
- If the employer does provide an employer contribution to the LTPT, unique vesting credit may apply
- The LTPT is excluded from various IRS compliance tests
- The employer may, at its discretion, permit or not permit the LTPT to make Roth deferrals and/or catchup contributions
How the LTPT counts towards a Plan’s audit headcount requirement is still unclear.
At present, this is proposed guidance with an expectation that final rules will be issued sometime following the close of the January 26, 2024 comment period. Stay tuned here for more information as it becomes available.