Navigating SECURE 2.0 changes to long-term part-time employee rules

The recently enacted SECURE 2.0 Act of 2022 (“SECURE 2.0”) will allow more part-time employees to participate in 401(k) and ERISA 403(b) plans. We know the changes are a lot to process, but in this article, we’ll help demystify the most important aspects of SECURE 2.0’s effects on the rules for long-term part-time employees.

First, some background

The original SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) mandated that an employee who completes at least 500 hours of service in three consecutive years must be allowed to participate in the elective deferral portion of a 401(k) plan. These employees are known as long-term part-time employees, or LTPTEs. The SECURE Act LTPTE rules apply to 401(k) plans only.

SECURE 2.0 makes two key changes to these LTPTE provisions. First, SECURE 2.0 reduces the 3-year requirement to a 2-year requirement. Second, SECURE 2.0 expands the LTPTE rules to ERISA 403(b) plans. We’re going to take a closer look at the LTPTE rules that will become effective in 2024 (as part of the original SECURE Act) and 2025 (as part of SECURE 2.0).

SECURE Act 3-year rule — 401(k) plans only

Part-time employees are often excluded from participating in a retirement plan because they don’t work enough hours. However, the SECURE Act requires that LTPTEs be eligible to participate in the elective deferral portion of a 401(k) plan beginning in 2024. Service before 2021 is ignored in determining an LTPTE’s eligibility.

Example: An employer maintains a calendar-year 401(k) plan with semi-annual entry dates. An employee works at least 500 hours each year from 2015-2022 and works 400 hours in 2023 and 2024. Even though she worked at least 500 hours for several consecutive years (2015-2022), she is not considered an LTPTE because she didn’t work 500 hours in 2023, and years before 2021 are ignored for LTPTE eligibility purposes. Had she worked 500 hours in 2023, then she would have entered the 401(k) portion of the plan January 1, 2024, because she would have had three consecutive years (2021-2023) with more than 500 hours of service.

SECURE 2.0 Act 2-year rule — 401(k) and ERISA 403(b) plans

As stated above, SECURE 2.0 reduced the SECURE Act’s 3-year rule to 2 years, and applies to ERISA 403(b) plans in addition to 401(k) plans. SECURE 2.0 allows 401(k) plans to continue to ignore pre-2021 service and ERISA 403(b) plans to ignore pre-2023 service. An LTPTE, under SECURE 2.0, will enter the elective deferral portion of the plan in 2025.

Example: Let’s assume the same facts as above. Ignoring pre-2021 service, the employee worked at least 500 hours of service in two consecutive years (2021 and 2022). Even though she did not work 500 hours in 2023 or 2024, her two consecutive years with 500 hours of service in 2021 and 2022 means she is considered an LTPTE under SECURE 2.0 and will enter the 401(k) portion of the plan January 1, 2025.

LTPTE employer contribution and vesting rules

Neither the SECURE Act nor SECURE 2.0 require LTPTEs to participate in the employer contribution portions of a plan. Plans can still require an employee to complete at least 1,000 hours of service in a year to participate in the employer portions of a plan. Accordingly, if a plan provides for a 1,000 hours of service eligibility condition, as long as an LTPTE never works 1,000 hours in a year, the LTPTE will continue to participate in the elective deferral portion of the plan but will never be eligible to participate in the employer contribution portions of the plan.

Be warned: If an LTPTE participates in the employer contribution portions of a plan, the LTPTE must receive a year of vesting service for each year the LTPTE works more than 500 hours of service. This is true even if, for example, the plan requires an employee to work 1,000 hours in a year to receive a year of vesting service for non-LTPTE participants.

The vesting rules as applied to LTPTEs are complex, so if you’re considering whether to allow LTPTEs to participate in the employer contribution portions of your plan, we recommend you contact your UBT Retirement Plan Services Relationship Manager.

Job classification exclusions

Many 401(k) plans exclude certain employees from participating based on job classification, regardless of the number of hours they work. For example, a plan might exclude hourly workers from participating in the plan. Continuing with this example, what happens if an excluded hourly worker completes at least 500 hours of service in two consecutive (SECURE 2.0) or three consecutive years (SECURE)?

The plan can still exclude the hourly worker from participating in the employer contribution portions of the plan. However, it’s not clear how SECURE and SECURE 2.0 apply to the 401(k) portion of the plan in this situation. The IRS is expected to issue guidance on this topic before 2024, and we expect that a plan will still be able to exclude hourly workers from the 401(k) portion of the plan in this type of situation. Until IRS guidance is issued, though, we recommend that you be prepared to permit these employees to participate in the 401(k) portion of the plan if the employee works the required number of consecutive years with 500 hours.

Part-time, temporary, and seasonal exclusions

Many plans also exclude part-time employees (including temporary and seasonal employees) from participating in a plan. However, these plans permit these employees to enter the plan if they complete 1,000 hours of service in a year, thus taking them out of “part-time” status. We expect that IRS guidance will require these part-time employees be eligible to participate in the elective deferral portion of a 401(k) plan if they work the required number of consecutive years with 500 hours. Plans will still be able to exclude these part-time employees from employer contributions provided they do not work at least 1,000 hours in a year.

Ultimately, the SECURE and SECURE 2.0 LTPTE rules will likely be challenging to administer. If you have any questions on how these new rules may apply to your plan, please contact your RPS Relationship Manager and they’ll be happy to help you work through these changes.