BizTech Law Blog

Navigating Long-Term Part-Time Employee Eligibility Rules for 401(k) Plans

The landscape of retirement plan eligibility is shifting, and plan sponsors need to prepare for key compliance changes affecting long-term part-time (“LTPT”) employees. These new rules, mandated by the SECURE Act of 2019 and expanded under the SECURE 2.0 Act of 2022, aim to improve retirement plan access for employees who work on a part-time basis for extended periods of time. Employers who sponsor 401(k) plans must ensure they understand and implement these changes to remain compliant and support their workforce effectively.

1. What Are the LTPT Eligibility Rules?

Beginning in 2024, employees who work at least 500 hours per year for three consecutive years (and who otherwise meet the employer’s non-service related eligibility requirements) must be allowed to make elective deferrals in the employer’s 401(k) plan. SECURE 2.0 shortened this requirement to two consecutive years of at least 500 hours starting in 2025. This generally means:

• 2024 Eligibility: Employees who worked at least 500 hours for two consecutive years beginning with 2021 (i.e., 2021, 2022 and 2023) must be allowed to make elective deferrals starting in 2024.
• 2025 Change: Employees who work at least 500 hours per year for two consecutive years beginning with 2023 (i.e., 2023 and 2024) must be allowed to make elective deferrals starting in 2025.
• Special Rule: Any employee who works at least 1,000 hours per year will be eligible to become a regular participant in the employer’s plan.

2. Key Considerations for Employers

• Tracking Hours Accurately: Employers need robust recordkeeping systems to track part-time employees' hours effectively and to determine eligibility under both the three-year and two-year rules.
• Plan Design Adjustments: Employers should review their 401(k) plan documents and consider amendments to ensure eligibility criteria are clear and compliant with LTPT provisions.
• Participation Limitations: LTPT employees must be allowed to make elective deferrals, but employers are not required to provide employer matching or profit-sharing contributions on their behalf.
• Vesting Considerations: For LTPT employees who do receive employer contributions, each year in which they work at least 500 hours must count toward vesting service.
• Coordination with ERISA and IRS Rules: Employers should ensure compliance with ERISA non-discrimination testing and IRS rules, particularly as they relate to coverage and participation requirements.

3. Action Steps for Plan Sponsors

• Review and update plan documents to reflect the LTPT eligibility rules.
• Enhance payroll and HR systems to ensure accurate tracking of employee hours.
• Communicate clearly with eligible employees about their rights to participate in the plan.
• Coordinate with recordkeepers and TPAs to confirm compliance with tracking and reporting obligations.
• Monitor legislative and regulatory guidance for any additional updates to the LTPT rules.
• Contact legal counsel if it is discovered that the plan did not comply with the LTPT rules.

4. Looking Ahead

Employers should stay proactive in adapting their 401(k) plans to meet compliance deadlines and support employee retirement savings. As always, consulting with an experienced benefits attorney or retirement plan advisor is essential to navigating these regulatory changes effectively.

If you need assistance with your 401(k) plan’s compliance or have questions about implementing LTPT eligibility rules, our firm is here to help. Contact us today to discuss your plan’s compliance strategy.

Categories: Employee Benefits, Employment, Retirement