On Friday, the Department of Treasury and the Internal Revenue Service released proposed regulations for 401(k) plans for long-term, part-time employees (LTPTE). As currently drafted, they would go into effect starting Jan. 1, 2024.
The proposal provides guidance on LTPTE rules that were established with the SECURE Act in 2019 and SECURE 2.0 in 2022. Under the SECURE Act, 401(k) plans can no longer have service conditions that prevent employees from making salary deferrals if they’ve worked for an employer for at least 500 hours for three consecutive years. SECURE 2.0 amended the rule so, starting in 2025, it will apply to employees who have worked 500 hours for an employer for just two, not three, consecutive years.
Prior to the SECURE Act, 401(k) plans were able to require employees to perform 1,000 hours of service in the period of a year before being eligible to participate in the plan.
The new guidelines seek to better define LTPTEs, eligibility conditions, and treatment of former LTPTEs under the SECURE Act rules. Key provisions include:
- The new rules only apply to LTPTEs who are “solely” in the plan because of the rules. Employees who are immediately eligible for a plan, for example, are not considered LTPTEs.
- All LTPTEs earn vesting for 500 hours of service in a 12-month period, instead of 1,000 hours, and that applies to all current and future employer contributions. Additionally, that more rapid rate of vesting will essentially apply forever, even if the LTPTE eventually earns 1,000 hours of service.
- Plans are still able to apply job class exclusions to LTPTEs as long as they don’t impose an impermissible age or service requirement.
- Under the new rules, the 12-month period for LTPTE service begins on the hire date but can later shift to the plan year.
The National Association of Plan Advisors (NAPA) released an analysis of the guidance and expressed concern that the rules become effective in just 25 business days after the proposed regulations were issued. However, the proposed regulations also state that plan amendments to reflect eligibility changes do not need to be made until the last day of the 2025 plan year for non-governmental plans.
The proposed regulation was published in the Federal Register on Nov. 27, triggering the start of a comment period that will last for 60 days, ending on Jan. 26, 2024. A public hearing on the proposed regulation has been scheduled for March 15, 2024, at 10 a.m. ET. Requests to attend the public hearing must be received by 5 p.m. ET on March 13, 2024.
Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG–104194–23) by following the online instructions for submitting comments.
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