The Secure Act of 2022 – Impact to Long-Term Part-Time Employees

When the Consolidated Appropriations Act of 2023 was signed into law late last year, it included a number of provisions affecting retirement savings plans. These provisions, collectively referred to as SECURE 2.0, offer many new benefits to employers and employees that are designed to make it more attractive for employers to offer retirement plans and to improve retirement outcomes for employees.  The focus of this update is on provisions affecting long-term part-time employees’ eligibility to participate in 401(k) and 403(b) plans.   Under SECURE 1.0, long-term part-time employees could participate in 401(k) retirement plans if they completed 1,000 hours of service within one year or 500 hours in each of three consecutive years for the 2024 plan year.   SECURE 2.0 changes the eligibility requirements to be considered a long-term, part-time employee from three consecutive years to two consecutive years for employees hired in 2023 or later.  SECURE 2.0 applies to 401(k) and 403(b) plans.

Next Steps

·       Generally, if you currently require an employee to work 1,000 hours of service in a twelve-month period to be eligible to participate and/or to be credited with a year of service for vesting (usually referred to as a minimum services requirement), you might need to modify your plan administration process to account for tracking hours back to January 1, 2021.   You should also prepare to amend your plan by the end of the 2025 plan year to incorporate the long-term, part- time eligibility requirements.

·       Click here for more details on the impact of SECURE 2.0 on long-term part-time employees and a list of frequently asked questions.

The Details

The SECURE Act, passed in December 2019, (SECURE 1.0) requires employers to permit long-term, part-time workers to participate in employer-sponsored 401(k) retirement plans, opening eligibility to employees that complete either 1,000 hours of service within one year or 500 hours of service in each of three consecutive years for the 2024 plan year.  Employees must also be allowed to defer from their own pay, but employers are not required to provide matching contributions on their deferrals, or non-elective contributions for employees who become eligible to participate in the 401(k) plan under this rule. The annual calculation period for accrued hours of services begins on January 1, 2021, with the first long-term, part-time employees becoming eligible to participate in the 2024 plan year.

The Secure Act of 2022 (SECURE 2.0), enacted into law on December 29, 2022, includes a provision to reduce the eligibility requirements to be considered a long-term, part-time employee from three consecutive years to two consecutive years for employees hired in 2023 or later.  Long-term, part-time employees who fall under the new rule could first become eligible beginning in 2025.  SECURE 2.0 applies to 401(k) and 403(b) plans.

Key Differences between SECURE 1.0 and SECURE 2.0 Long Term, Part-Time Provisions

Frequently Asked Questions

1. What are the long-term, part-time (LTPT) eligibility requirements?

Beginning January 1, 2021, if your employee completes a minimum of 500 hours of service but not more than 1000 hours of service for three consecutive years, the employee meets the LTPT eligibility requirements. Then, beginning January 1, 2023, if your employee completes a minimum of 500 hours of service but not more than 1000 hours of service for two consecutive years, the employee meets the LTPT eligibility requirements.

2. Does the new requirement impact the minimum age requirement in my plan?

No. LTPT employees must still meet any applicable minimum age requirements under your plan.

3. What happens if they complete less than 500 hours of service during any year of the three-year (or two-year) consecutive period?

The employee will not be eligible to participate in the 401(k) plan and the three-year (or subsequent two-year) eligibility period is reset, and the employee’s LTPT eligibility is re-determined based on hours of service and years of service beginning with the first year that the employee completes 500 or more hours of service.

4. What constitutes the 12 months for counting the 500 hours of service for LTPT eligibility purposes?

The LTPT eligibility calculation, under many plan provisions, starts from the date of hire to the anniversary date of hire, and then in future years, the eligibility period is measured based on the Plan Year. However, some plans measure the eligibility computation period solely on anniversary years.

5. What if my part-time employee completed less than 1,000 hours of service toward the LTPT eligibility rules but completed more than 1,000 hours of service in a future year?

The employee would become eligible under the regular plan rules.

6. Do I have to track all of an employee’s hours under this new requirement?

Yes, if you use the actual hours rules for crediting service then an “hour of service” must include any hour for which the employee is paid but during which no duties were performed. These situations would include paid vacation time, holidays, sick time, and jury duty, among others.

7. Am I able to continue excluding certain classes of employees?

Yes, certain non-service based classes of employees (e.g., geographic location, title) may still be excluded but employers should review members of such excluded class for the exclusion reason—if it is service based, the LTPT rules could apply.

8. I have collectively bargained employees, does this impact them?

No, the new eligibility requirements do not apply to employees covered by a collectively bargained agreement.

9. My LTPT employee met the eligibility requirements but did not complete over 500 hours of service the following year. Can I remove them from the Plan?

No, once an employee has met the LTPT eligibility requirements, the employee will always be eligible to participate in your Plan under the LTPT rule.

10. What do I need to do when a LTPT employee becomes eligible?

You must provide them with all the required documentation, such as the Participant Fee Disclosure Statement and Summary Plan Description (SPD) and, if applicable, the Safe Harbor Disclosure and Automatic Enrollment Disclosure.

11. When can my LTPT employee enter the Plan?

If a LTPT employee becomes eligible then their entry date in the plan must be no later than the earlier of the first day of the plan year after satisfying the requirements or the date 6 months after satisfying the requirements. NOTE: Once the employee has worked three consecutive years (two consecutive years for the 2025 plan years and after) with between 500 and 1,000 hours, the employee may enroll in the Plan on the next Plan entry date.

12. How do I exclude a LTPT employee from the match and Safe Harbor/Non-Elective Contributions?

Your Plan provisions can provide that LTPT employees are not eligible for matching or nonelective contributions.

13. How many hours does an employee that became eligible under the LTPT rules need to work in subsequent years to earn a year of vesting service?

Your LTPT employee will earn a year of vesting for each year they work at least 500 hours, including years both before and after they become eligible to participate.

14. I have an employee who was rehired within a 12-month period. Are all hours included to determine eligibility?

Yes, since the employee had a break in service of less than one year, all hours of service during the year must be counted to determine eligibility.

15. I have a 403(b) plan, does the new requirement impact my 403(b) plan?

Yes, but only the requirement under SECURE 2.0 and not the previous requirement under SECURE 1.0.

403(b) plans have a universal availability requirement—meaning that, in general, all employees must be eligible to make deferrals—sponsors have been able to design 403(b) plans to exclude employees who normally work less than 20 hours per week and employees who are students enrolled and regularly attending classes. After SECURE Act 2.0 and the amendments to ERISA and the Internal Revenue Code, 403(b) Plans are prohibited from excluding for deferral purposes, any employees who are long-term part-time employees. As a result, for plan years beginning on or after January 1, 2025, both student employees and employees who normally work less than 20 hours per week will be eligible under their employer’s 403(b) plan after two consecutive years of 500 hours or more of service (only under SECURE 2.0’s two-year rule in the 2025 plan year; no three-year look-back for 2024).

Examples

Xylophone Tuning Company sponsors a 401(k) plan and in 2020 hires both Patty and Peter in part-time positions and they are both over 21 years of age. The 401(k) plan requires that an employee complete a minimum year-of-service in order to be eligible. The Xylophone Tuning Company has updated its 401(k) plan to comply with the SECURE Act’s long-term, part-time employee eligibility requirements and its 401(k) plan specifies that a year-of service is determined using the hours-of-service method and uses a calendar plan year. 

Long-term, part-time Eligibility under the three-year lookback (for 2024 plan year only)

·       2021, Patty completes 520 hours of service (Year One)

·       2022, Patty completes 580 hours of service (Year Two)

·       2023, Patty completes 620 hours of service (Year Three)

·       2024, Patty is Eligible to participate on the first day of the 2024 plan year.  Patty will continue to be eligible in 2025 and beyond, even though she completed less than 500 hours of service in 2024.

Long-term, part-time Eligibility under the two-year lookback (for all plan years beginning on or after January 1, 2025)

·       2021, Peter completes 480 hours of service

·       2022, Peter completes 580 hours of service

·       2023, Peter completes 620 hours of service (Year One)

·       2024, Peter completes 580 hours of service (Year Two)

·       2025, Peter is Eligible to participate on the first day of the 2025 plan year and every year thereafter.