The IRS recently released proposed regulations (RIN 1545-BQ70) implementing the new mandatory eligibility rules that lower the service hour threshold for long-term, part-time employees to qualify for elective deferrals for 401(k) and 403(b) plans.
The proposed regulations also address several other aspects of the new Section 401(k) and 403(b) eligibility rules for long-term, part-time employees, including the applicable service crediting rules for determining eligibility, the special vesting rules, the permissible eligibility exclusions not based on a participant’s age or years of service and special non-discrimination rules that may apply.
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) added a new 401(k) eligibility rule, requiring Section 401(k) plans to allow employees who complete at least 500 hours of service during each of three consecutive 12-month periods to make elective deferrals under the plan. However, plan sponsors are not required to provide matching contributions or other employer contributions to these long-term, part-time employees. Under the previous rules, Section 401(k) plans were not required to allow employees to enter the plan and make elective deferrals until they completed 1,000 hours of service in a 12-month period, though plan sponsors could always allow employees to enter a plan on more favorable terms, such as immediately upon employment.
This change was effective for plan years beginning after Dec. 31, 2020, but because the new rule provides that 12-month periods beginning before Jan. 1, 2021, do not have to be taken into account, the first plan year in which a long-term, part-time employee would be eligible under the new rule generally would be the first plan year beginning in 2024. The legislation commonly referred to as the SECURE 2.0, enacted in December 2022, expanded this new eligibility rule to Section 403(b) plans (with a retroactive measure, making them effective dating back to the passage of the first SECURE Act).
The proposed regulations would apply to plan years beginning on or after Jan. 1, 2024, the first plan year the changes generally could require a long-term, part-time employee to become eligible to participate in a Section 401(k) or Section 403(b) plan. Plan sponsors can rely on the rules set forth in the proposed regulations before they are finalized.
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