IRS Issues More Guidance Addressing Long-Term, Part-Time Employees:

As background, the so-called SECURE 1.0 Act provided that if a part-time employee who is at least 21 completes at least 500 hours of service for three consecutive years, the employee must be allowed to make elective deferrals to his or her employer’s 401(k) plan. The earliest entry date for such employees was January 1, 2024. In addition, under the SECURE 2.0 Act, if a part-time employee who is at least 21 completes at least 500 hours of service for two consecutive years,  the employee must be allowed to make elective deferrals to his or her employer’s 401(k) plan or 403(b) plan. The earliest entry date for such employees will be January 1, 2025.

On November 24, 2023, the IRS published proposed regulations addressing those long-term, part-time (“LTPT”) employee provisions, but only for 401(k) plans. Those proposed regulations did not apply to 403(b) plans. On October 3, 2024, however, the IRS published Notice 2024-73 (the “Notice’) to address certain “discrete issues” for LTPT employees regarding 403(b) plans.

Under the longstanding universal availability requirement, all employees of an employer maintaining a section 403(b) plan generally must be permitted to make elective deferrals if any employee of the employer is permitted to make elective deferrals. Under an exception to that general rule, certain categories of employees can be uniformly excluded from making elective deferrals (e.g., part-time employees who normally work fewer than 20 hours per week; students performing certain services). In this regard, the Notice provides:

• A 403(b) plan that is subject to ERISA must provide the right to make elective deferrals to a part-time employee who satisfies the SECURE 2.0 Act requirements. The longstanding part-time employee exclusion under pre-SECURE 2.0 Act law still applies to employees who normally work fewer than 20 hours per week, however, if a plan provides for that exclusion. Thus, employers whose plan excludes part-time employees who normally work fewer than 20 hours per week will have to ensure compliance with  that requirement as well as the SECURE 2.0 Act’s requirements in order to determine part-time employees’ eligibility.
• A section 403(b) plan that is subject to ERISA can continue to exclude student employees from making elective deferrals under the plan, regardless of whether such employee satisfies the SECURE 2.0 Act’s requirements.

With respect to plan contributions, the Notice provides:

• An employer with a section 403(b) plan that is subject to ERISA may exclude LTPT employees who satisfy the SECURE 2.0 Act’s requirements from receiving employer contributions. That applies to plans using the ACP safe harbor as well, in that they do not have to provide safe harbor contributions to employees who satisfy the SECURE 2.0 Act’s requirements.
• If an employee who satisfies the SECURE 2.0 Act’s requirements exceeds those service  requirements (e.g., because he or she works 1,000 hours and is no longer a part-time employee), the employer cannot exclude the employee from receiving nonelective or matching contributions.

The Notice applies to plan years beginning after December 31, 2024, so employers do not have much time to ensure compliance. The IRS anticipates issuing additional guidance concerning LTPT employees in 403(b) plans, in the form of proposed regulations, which the IRS expects “generally will be similar to final regulations with respect to section 401(k) LTPT employees.”

The Notice also provides that when the IRS’s above-referenced November 24, 2023 proposed regulations for 401(k) plans are finalized, the final regulations will apply no earlier than to plan years that begin on or after January 1, 2026.