The Internal Revenue Service on November 27, 2023 published proposed regulations that would provide definitions under Section 401(k) of the Internal Revenue Code regarding the long-term, part-time employee rules, recently enacted under the Setting Every Community Up for Retirement Enhancement Act of 2019 (the "SECURE Act") and SECURE Act 2.0 of 2022 ("SECURE 2.0").
Background. Prior to the new rules, employers who sponsored a 401(k) plan generally were permitted to exclude part-time employees if they did not work 1,000 hours of service in a 12-month period. Under the SECURE Act, employers generally must permit "long-term, part-time" ("LTPT") employees to participate in the elective deferral portion of a 401(k) plan if they complete 500 hours of service for three consecutive 12-month periods. SECURE 2.0 shortened this period to two consecutive 12-month periods and made the rule applicable to 403(b) plans as well.
The proposed regulations would provide new rules under Treasury Regulation § 1.401(k)-5 that would apply to plan years that begin on or after January 1, 2024, and can be relied on by taxpayers before they are finalized. The proposed regulations include the following:
- A definition of an LTPT employee, including specifying that an employee becomes an LTPT employee only upon their eligibility to participate and detailing the application of the various service crediting rules to determine LTPT employee status.
- Participation requirements, including the time an LTPT employee must be permitted to participate, determination of 12-month periods, permissible application of eligibility conditions that are not based on age and service, and prohibiting restrictions on an LTPT employee's right to defer.
- Vesting rules, including determining the years of vesting service that must be taken into account (if employer contributions are made on behalf of LTPT employees) and how former LTPT employees (e.g., those who subsequently meet the 1,000 hour rule) must be treated.
- A general rule that employer contributions are not required, but may be made on behalf of LTPT employees, as well as coordinating rules addressing safe harbor plans.
- Specific employer elections rules, including the application of nondiscrimination, coverage, and top-heavy requirements.
- Other issues, including catch-up contributions, Roth elective contributions, and audit issues.
A public hearing on the proposed regulations is scheduled for March 15, 2024. Comments on the proposed regulations, requests to speak, and outlines of topics to be discussed at the hearing are due on or before January 26, 2024.
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