IRS Provides Guidance on Application of SECURE 2.0 Act’s Coverage of Long-Term, Part-Time Employees

By Jon Schultze and Barry Salkin

In Notice 2024-73, the Internal Revenue Service (“IRS”) issued guidance on the application of certain non-discrimination rules to long-term, part-time employees in Internal Revenue Code (“Code”) Section 403(b) plans subject to ERISA (“ERISA LTPT employees”). The SECURE Act modified the eligibility requirements for long-term, part-time employees under Section 401(k) plans (see our November 1, 2023 newsletter); the SECURE 2.0 Act made similar modifications for long-term, part-time employees under § 403(b) plans. An ERISA LTPT employee who has attained age 21 must be able to make elective deferrals on the earlier of: (i) completion of a year of service in which he or she is credited with at least 1,000 hours of service; and (ii) the end of the first 24-month period consisting of two consecutive 12-month periods during each of which the employee has been credited with at least 500 hours of service, excluding 12-month periods beginning before January 1, 2023.

The Notice, which applies to plan years beginning after December 31, 2024, provides the following guidance:

1. The eligibility rules for ERISA LTPT employees do not apply to a § 403(b) plan that is not subject to ERISA. In addition to governmental and nonelecting church plans, § 403(b) plans not subject to ERISA are those providing for no nonelective or matching contributions, and no employer involvement in plan administration.
2. A § 403(b) plan that is subject to ERISA must provide the right to make ERISA contributions to any employee who qualifies as an ERISA LTPT employee.
3. A § 403(b) plan that is subject to ERISA may retain a part-time employee exclusion for part-time employees, i.e., employees who normally work less than 20 hours per week, who do not qualify as ERISA LTPT employees, so long as the exclusion from making elective deferrals applies to all part-time employees who do not qualify as ERISA LTPT employees.
4. A § 403(b) plan that is subject to ERISA may exclude student employees from making elective deferrals, even if they are ERISA LTPT employees, because this is a statutory exclusion based on a classification. Similarly, a § 403(b) plan subject to ERISA may continue to exclude nonresident aliens and employees otherwise eligible under another § 403(b) plan, an eligible governmental 457(b) plan, or a § 401(k) plan maintained by the same employer.
5. An employer with a § 403(b) plan that is subject to ERISA may exclude ERISA LTPT employees when determining whether the plan satisfies the Code’s nondiscrimination requirements for matching contributions, whether the plan is required to satisfy the actual contribution percentage test or one of the Code’s safe harbor alternatives for satisfying the Code’s nondiscrimination requirements for matching contributions.
6. Once an ERISA LTPT employee ceases to be an ERISA LTPT employee, for example, by being credited with at least 1,000 hours of service in the prior plan year, that employee can no longer be excluded from receiving nonelective or matching contributions or from the application of the applicable Code nondiscrimination requirement.

According to Notice 2024-73, the IRS anticipates issuing proposed regulations on the subject of the Notice that will also address the special vesting rules for § 403(b) plans covering ERISA LTPT employees. These will generally be similar to the regulations for § 401(k) plan LTPT employees. Notice 2024-73 also states that the final regulations IRS intends to issue for long-term, part-time employees under § 401(k) plans will apply no earlier than plan years that begin on or after January 1, 2026. Pending the issuance of final regulations, taxpayers will need to comply with a reasonable good faith interpretation of the SECURE Act.

The IRS has yet to issue guidance on many of the changes made by the SECURE and SECURE 2.0 Acts, and much of its guidance has been in the form of questions and answers. We will keep you informed as further guidance is issued and explain any actions plan sponsors may need to take once provisions become effective.

If you have any questions or concerns about how the new ERISA Section 403(b) plan requirements will affect your plan, please feel free to contact us for assistance.

Jon Schultze focuses on Employee Benefits and ERISA.Jon oversees the firm’s qualified retirement plan area, which includes ensuring that our clients’ retirement plans conform to legal requirements.

Barry Salkin concentrates his practice in ERISA and employee benefits law. He has significant expertise drafting, amending and negotiating various ERISA and employee benefit plans, including defined benefit pension plans, profit sharing plans, 401(k) plans, as well as qualified and non-qualified deferred compensation programs.