Long-term part-time workers may be eligible to participate in a 401(k) plan.

Revised March 2023 An overview of the provision and employee eligibility requirements.

SECURE 2.0 Act of 2022

On December 29, 2022, President Biden signed into law the SECURE 2.0 Act of 2022 (SECURE 2.0). This occurred as part of the passage of the Consolidated Appropriations Act, 2023, a federal government spending package. The bipartisan legislation builds on the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0), retirement legislation signed into law at the end of 2019, and includes reforms that seek to expand retirement coverage and savings. There were two changes to the long-term, part-time employee provision, one for 401(k) plans for the 2024 plan year and another for both 401(k) and 403(b) plans subject to ERISA for 2025 and subsequent plan years.

For the plan year beginning in 2024 for 401(k) plans: Service prior to 2021 is disregarded for vesting purposes so that the eligibility and vesting service requirements are harmonized. This change means that 401(k) plans in effect before 2021 will be subject to the three consecutive year eligibility service requirement for the 2024 plan year and the vesting service before 2021 will be disregarded. The three consecutive year eligibility service requirement will be reduced to two consecutive years beginning with the 2025 plan year. This does not change the other requirements that an employer can determine if they want to offer any long-term, part-time employees any employer contributions and/or include them in certain nondiscrimination tests.

For plan years beginning in 2025 for 401(k) and 403(b) plans subject to ERISA:

401(k) Plans: Expands plan eligibility for long-term, part-time workers after two consecutive years of service, except in the case of collectively bargained plans. Employers maintaining a 401(k) plan may need a dual eligibility requirement under which an employee must complete either a one- year of service requirement (1,000 hours of service during the 12-month eligibility service computation period) or two consecutive years of service where the employee completes at least 500 hours of service in a 12-month eligibility service computation period. Service prior to 2023 is disregarded for vesting purposes so that the eligibility and vesting service requirements are harmonized. This does not change the other requirements that an employer can determine if they want to offer any long-term, part-time employees any employer contributions and/or include them in certain nondiscrimination tests.

403(b) Plans Subject to ERISA: This provision also extends the long-term, part-time coverage rules to 403(b) plans that are subject to ERISA. The two consecutive year eligibility and vesting service requirements will apply to these 403(b) plans starting in 2025, which means that 2023 and 2024 will be “look-back” years in 2025.

The information below is still relevant to SECURE 1.0 Act and is 401(k) plan specific, 403(b) guidance will follow at a later date.

Passed by Congress in 2019 (commonly referred to as SECURE 1.0 Act), SECURE stands for “Setting Every Community Up for Retirement Enhancement” and includes significant changes to several defined contribution plan rules.

One of these changes in particular affects long-term, part-time (or LTPT) employees. Through the Act, LTPT employees may be eligible to participate in a 401(k) plan.

To understand the high-level changes, watch the video below, and keep reading for more information on the details:

Who is eligible?

There are some specific eligibility service criteria that come along with the new legislation:

LTPT employees must complete at least 500 hours of service in each 12-month eligibility service period.
This must happen over three consecutive years.
The eligibility service window applies for plan years beginning after December 31, 2020, and excludes service before 2021.

Generally, long-term, part-time employees will not be able to participate in a 401(k) until 2024.

What are they eligible for?

The long-term, part-time provision only allows those eligible employees to make deferral contributions to the 401(k) plan. As a plan sponsor, you still have the option to require the employee to satisfy the minimum age requirement, and you still have discretion over whether to allow them to receive any employer contributions.

The exceptions

There are a number of exceptions to the legislation:

Plan type: There are a couple of retirement plan types that are exempt from this legislation.
o This rule applies to all 401(k) plans but does not extend to non-401(k) plans, such as 403(b) and governmental 457(b) plans.
o This provision does not apply to employees covered by a collective bargaining agreement between the employee representatives and one or more employers.
Plan design: Some plan designs will not be affected by the long-term, part-time employee provision. For example, if a plan allows immediate eligibility or requires a short service requirement, such as three-months or less, then the long-term, part-time employee provision will not apply since employees will be eligible before completing 500 hours of service.
Plans not tracking employee hours: It's also worth noting that some 401(k) plans track employee hours to determine eligibility, but others use the “elapsed time method” instead. For example, if a plan has a one-year elapsed time eligibility service requirement, the employee won’t need to work a certain number of hours, but instead must still be employed on their one-year employment anniversary date to satisfy the plan’s eligibility service requirement. The LTPT employee provision will not apply to those employees since they will be eligible to participate in the plan after they satisfy the plan’s age, service and entry date requirements.

Tracking employee eligibility hours of service

As you’ve just read, a long-term, part-time employee becomes eligible for 401(k) provisions when they complete at least 500 hours of service every 12-month eligibility service computation period, over three consecutive years, but how does that get calculated? Watch the video to look at a couple of examples of how this works.

Let’s look at those same two examples in some more detail.

Example One:

A plan sponsor has a 401(k) plan with a December 31^st year-end. It counts hours of service from the date of hire through to the employee’s anniversary date. The plan has a requirement for one year and 1,000 hours of service, with monthly entry dates on the first of each month. This 25-year-old employee’s date of hire is June 1, 2019 and his hours of service for the past few years are listed below.

Example Two

Now let’s look at the same employee situation, except that the eligibility computation period switches to the plan year, from January 1^st through December 31^st, if he doesn’t complete 1,000 hours of service during the first 12-month eligibility service computation period from his date of hire.

Please review your internal procedures to begin tracking 2021 hours to meet the provision requirements. Fidelity will continue to evaluate the effect on our eligibility tracking service, and we will provide more information to plan sponsors as soon as it’s available.

Next steps

We understand that these regulations are complex. To assist plan sponsors, we will be providing follow-up information concerning decisions that plan sponsors should consider as well as information that Fidelity will be requiring in the upcoming months from plan sponsors.