Vanguard news : Fiduciary Regulatory | December 13, 2023

IRS delivers SECURE 2.0 Act long-term part-time guidance

On November 24, 2023, the Internal Revenue Service (IRS) issued a proposed regulation providing guidance on the SECURE Act of 2019 and SECURE 2.0 Act of 2022 provisions regarding long-term part-time (LTPT) employees. The LTPT provision was originally introduced through the SECURE Act of 2019, requiring part-time employees who worked at least 500 hours in each of three consecutive years to become eligible to make elective deferrals, effective January 1, 2024. The SECURE 2.0 Act reduces the period from three years to two years, beginning January 1, 2025. Additionally, SECURE 2.0 builds on the original provision by extending LTPT employee coverage to 403(b) plans and updating vesting requirements.
Under SECURE 1.0 and SECURE 2.0, employees entering a plan as LTPT are subject to special rules, including the ability for a sponsor to exclude them from (i) receiving employer contributions, (ii) all coverage and nondiscrimination testing, and (iii) top-heavy rules. In addition, LTPT employees are required to receive a year of vesting service for each 12-month period in which they work at least 500 hours. 

Key takeaways from the proposed regulation

  • Definition of LTPT employees: The proposed regulation defines “long-term, part-time employees” as employees who are eligible to participate in a plan “solely by reason” of completing 500 hours of service in the prescribed period (that is, either two or three consecutive years). In addition, to be considered an LTPT employee, employees must also have reached age 21 by the close of the last of the 12-month periods described above. Employees who have met the LTPT requirements continue to be eligible to participate in the plan even if they work less than 500 hours in a subsequent year.

  • Definition of former LTPT employees: The proposed regulation defines “former LTPT employees” as employees who initially enter the plan as LTPT employees but subsequently complete one year of service (that is, work 1,000 hours during an eligibility computation period) or cease to be eligible for the plan due to a reason not related to age or service (for example, transfers to a location that is not eligible to participate in the plan).  

  • Applicability of LTPT rules: The proposed regulation specifies that LTPT rules only apply to employees who meet the definition of LTPT employees, as noted above. This means that a plan designed to have more liberal eligibility requirements will not be subject to the LTPT employee provisions and cannot take advantage of the special rules applicable to LTPT employees. In addition, the LTPT eligibility rules do not apply to former LTPT employees, but the 500 hours vesting rule described below does apply to former LTPT employees.   

  • Determination of eligibility computation period and plan entry dates: The proposed regulation confirms that the LTPT 12-month periods of service for eligibility determination begin on date of hire but may be shifted to plan year, as specified in the plan document. These are the same computation period rules that can be applied to non-LTPT participants. The proposed regulation also confirms that the plan entry date rules for LTPT employees mirror those of non-LTPT employees.

  • 500 hours of service vesting requirement: The SECURE Acts specify that a year of vesting service must be granted to an LTPT employee for each 12-month period during which the employee works 500 hours. The proposed regulation specifies that the LTPT vesting computation period rules are consistent with those for non-LTPT employees and may be a calendar year, plan year, or other 12-month consecutive period defined in the plan document. Additionally, the proposed regulation confirms that the 500 hours requirement will continue to apply to an LTPT employee who subsequently becomes a former LTPT employee. 

  • Job class exclusions: The proposed regulation confirms that job class eligibility exclusions are still permitted if they do not have the effect of age or hours-based exclusions. For example, an exclusion based on a location that only contains part-time employees would likely be considered an hours-based exclusion and not permitted.  

  • Nondiscrimination testing: The proposed regulation confirms that an employer may elect to exclude all LTPT employees for purposes of determining whether the plan satisfies all nondiscrimination and coverage testing. This holds true even if an employer provides matching and/or nonelective contributions to LTPT employees.

  • Safe harbor plans: The proposed regulation confirms that a traditional or qualified automatic contribution arrangement (QACA) safe harbor 401(k) plan may exclude LTPT employees from the safe harbor 401(k) employer contribution (that is, safe harbor 401(k) match or safe harbor 3% nonelective) without negating the plan’s safe harbor status. The exclusion of LTPT employees from safe harbor contributions must be explicitly stated in the plan document and be in place for the full plan year.

  • 403(b) plans: The proposed regulation only amends existing 401(k) regulations; however, it is expected that the rules for 403(b) plans will be similar when guidance is issued for these plans. 

The proposed regulation will apply to plan years beginning on or after January 1, 2024, and plan sponsors can rely on the proposal until the regulation is finalized, or other guidance is issued. The proposal is open to a 60-day public commentary period ending on January 26, 2024.

In the meantime, plan sponsors should continue to consult with their counsel and service teams to meet the implementation requirements of the January 1, 2024, effective date.


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