The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act became law in December of 2019 and dramatically changed the laws regulating tax-qualified retirement plans. Since then, we have also seen the passage of additional retirement plan legislation in December of 2022 commonly referred to as “SECURE 2.0”. This article is focused on one change initially implemented under the SECURE Act and then further modified under SECURE 2.0. More specifically, the now effective requirement to allow “long term part-time employees” (“LTPTE(s)”) to defer their salary into 401(k) plans. For most plan sponsors, this new requirement became effective January 1, 2024 and could require that previously ineligible employees can now participate in their 401k plans. Therefore, it is critical for retirement plan sponsors to understand this recently effective obligation now to ensure that they are already operating in accordance with it.

Reduced Eligibility Requirements for Long-term, Part-time Employees

Most plan sponsors understood the eligibility service requirements that applied to their employees under the Internal Revenue Code and the Employee Retirement Income Security Act (“ERISA”) before the SECURE Act. In summary, a plan sponsor generally could restrict retirement plan participation to only those employees who accrue at least 1,000 hours of service during a 12-month eligibility period in order to achieve one “year of service” (“One Year of Service Rule”). However, the SECURE Act dramatically changed the application of the One Year of Service Rule but only in connection with a 401(k) elective deferral feature.

Now, under the SECURE Act, employees with at least 500 hours of service in three consecutive 12 month periods must be permitted to make elective deferrals under a 401(k) defined contribution plan. This change to the service eligibility rules does not impact the age eligibility rules. Thus, requiring the attainment of age 21 in order to be allowed to make elective deferrals into a 401k plan is still permitted.

To reiterate, the SECURE Act eligibility provision only applies to an elective deferral feature of a 401(k) plan. Thus, a plan sponsor who is forced to allow LTPTEs to defer a portion of his or her salary into a 401(k) plan in this manner could, but is not required to, continue to restrict the same employee from receiving an employer matching or profit sharing contribution until such individual satisfied the “normal” One Year of Service Rule. In addition, the LTPTEs who are allowed to defer a portion of their income are excluded from the nondiscrimination, minimum participation, top-heavy and coverage requirements that might otherwise apply. Therefore, in general, the ability of the LTPTEs to defer as a result of this exception will not hurt the plan sponsor due to any otherwise applicable mandatory compliance testing requirement.

In applying this requirement, it is important to recognize that the first 12-month period used to measure the completion of 500 hours of service in order to determine whether a LTPTE has accrued 500 hours of service in three consecutive 12 month eligibility periods begins no earlier than January 1, 2021. Thus, under the currently effective rule, a plan sponsor is not required to credit service in this manner for any eligibility periods beginning prior to January 1, 2021. Therefore, the earliest that an LTPTE could accrue three consecutive 12 month eligibility periods with at least 500 hours of service would be December 31, 2023 which would then trigger an initial participation date of no earlier than this past January 1, 2024. Consequently, plan sponsors already should have been collecting and analyzing the relevant payroll and employment data from 2021 and 2022 in order to potentially enroll LTPTEs as early as of this past January 1, 2024.

Finally, there are sure to be plan sponsors who inadvertently fail to comply with this rule. However, if the failure is resolved quickly upon detection, the economic consequences of correction may be extremely limited. Therefore, it is important for plan sponsors with compliance failures to affirmatively communicate those issues to their qualified retirement plan professionals as soon as possible.

SECURE 2.0 Further Reduces Long-term, Part-time Employee Eligibility

We mentioned SECURE 2.0 at the beginning of this article. For better or worse, the broad impact of SECURE 2.0 included a further reduction to the LTPTE rules imposed under the SECURE Act. In this regard, SECURE 2.0 reduced the three year period during which an employee accrued at least 500 hours of service to a two year period during which an employee accrued at least 500 hours of service. However, this rule change will not go into effect until plan years beginning after December 31, 2024. Therefore, the earliest that an LTPTE must be allowed to defer to a 401k plan under the revised SECURE 2.0 rule would be January 1, 2025.

SECURE 2.0 also further extended the application of the LTPTE rules to 403(b) plans. However, it remains unclear how this extension of the rule will apply due to the pre-existing 403(b) “universal availability” requirements. Presumably, the impact of this extension of the rule will be limited to certain previously permitted excluded classifications of employee under 403(b) (student employees and those normally working fewer than 20 hours per week). Regardless, additional guidance from the IRS is necessary before these issues can be resolved.

To be clear, the SECURE 2.0 rule adjustment does not alter a plan sponsor’s obligation to comply with the SECURE Act LTPTE rules for 2024. Consequently, the SECURE Act “three year” rule will apply for 2024. However, effective for 2025 and into the future, the SECURE 2.0 “two year” rule will apply.

We hope that this article helped you to better understand this topic and encouraged plan sponsors to operate their plans in compliance with the new law. However, this article is not intended to serve as financial, tax or legal advice so it should not be construed as such. If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.