IRS releases regs on long-term part-time employees’ eligibility for retirement plans

IRS released regs at the end of November, leaving retirement plan sponsors with just over a month to get their 401(k) plans up to speed.

The regs pertain to long-term part-time employees’ eligibility to participate in 401(k) plans – starting with 2024 plan years!

Although the regs are only at the proposed stage, IRS said employers may rely on them. The long-awaited regs implement provisions of two recent laws.

2 laws on retirement plans

Law #1: The Secure Act of 2019. This law altered the hours-of-service requirements for participation in 401(k) plans.

While 1,000 hours per plan year will remain the standard for full-time employees, now part-time employees can make contributions if they work 500 hours per year for three consecutive years – the clock starting ticking in 2021 for any employees on the payroll at that time.

So, starting January 1, 2024, some part-time employees must be allowed to make 401(k) plan contributions through payroll deductions. Note: An employer match or other retirement plan contribution isn’t required, but your company may decide to offer that to long-term part-time employees, as you do for employees who meet the 1,000-hours-of-service requirement.

Law #2: The Secure 2.0 Act of 2022. This law modified the earlier one.

Starting in 2025, the service requirements for part-timers will be further reduced to 500 hours per year for two – as opposed to three – consecutive years.

Who’s eligible?

Here are some details to know about the proposed regs that appeared in the Federal Register on November 27, 2023:

First, you should start counting hours on the employee’s first day of employment. Say that person’s start date occurred during the middle of your plan year. For administrative purposes, in the following year you could start counting for that year from the beginning of your plan year.

Second, once a part-timer meets the eligibility standards for your retirement plan as stated above, if that person’s hours are less than 500 in a subsequent year, he or she wouldn’t cease to be a long-term part-time employee and therefore could continue to make contributions.

Third, let’s say a former employee who became eligible to participate as a long-term part-time employee is rehired. Then, for purposes of determining eligibility to participate in your 401(k) plan, your company would need to take into account the 12-month periods during which that person previously was credited with at least 500 hours of service.

Fourth, you don’t necessarily need to count employees’ hours to determine someone’s eligibility for retirement plan participation. After all, that may be difficult if you have some employees paid on a salary basis. Instead, to ease your administrative burden, you may decide to use other methods. The other possible methods are the:

• elapsed time method (with this, you rely on the period of time that elapses while an employee is employed by your company, but a plan can’t require an employee to complete more than a one-year period of service), and
• equivalency method (here, employees are credited a certain number of hours of service for a set period of time worked – such as 190 hours per month if at least one hour was worked that month).

Fifth, IRS clarified that the definition of long-term part-time employees doesn’t include:

• certain employees covered by a collective bargaining agreement, and
• nonresident aliens who don’t receive U.S. source income.

Clarity on vesting

The proposed regs also explain how to handle vesting in your retirement plan.

All 12-month periods in which the employee had at least 500 hours of service with the employer must be taken into account for vesting purposes (this pertains to any employer contributions to the retirement plan, not employees’ elective salary deferrals).

But 12-month periods that began before January 1, 2021, aren’t taken into account when it comes to eligibility or vesting.

Also of note, IRS clarified that a 401(k) plan can use the same vesting computation period that it uses for other employees – i.e., a calendar year, a plan year or another 12-consecutive-month period. Using a long-term part-time employee’s eligibility computation period isn’t required.

Deadline for comments

As mentioned, employers can rely on the regs even though they haven’t been finalized.

Meanwhile, IRS is accepting comments on the proposed regs until January 26, 2024.

We’ll keep you up to date on any developments.