Retirement savings for long-term, part-time employees: What is changed with SECURE 2.0

March 8, 2024 Update: IRS issued Notice 2024-2 in December 2023 extending the deadlines for plan sponsors to adopt required and discretionary plan amendments related to SECURE 2.0. Changes to this article are shown in green.

Where it all began: How SECURE 1.0 created long-term, part-time employees

When the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act,” now commonly referred to as “SECURE 1.0”) passed, it included a provision aimed at increasing 401(k) retirement savings access for long-term, part-time employees, i.e., those employees who have worked for the same employer for a number of years in a part-time or even seasonal capacity. Through this article we refer to these long-term, part-time employees by the acronym LTPTs.

As the provision was written, beginning with plan years after December 31, 2020, nonunion LTPTs must be allowed to make elective deferral contributions to their employer’s 401(k) plan after completing three consecutive 12-month periods of employment with at least 500 but no more than 999 hours of service; they must also reach the age of 21 by the end of the three-year period. Only service after 2020 is considered for this purpose. Because LTPTs would need to have three consecutive years of this level of service, the earliest an LTPT could enter a 401(k) plan, assuming entry dates based on the standard plan-year, would be the first day of the plan year beginning after December 31, 2023. So, for calendar-year plans, the first entry date would be January 1, 2024.

Hours of service for an LTPT employee can be calculated on either anniversary of employment years, or the employer may switch to plan years after the initial anniversary year. Once an LTPT has satisfied the age and service requirements, the plan can apply a standard entry date requirement that is no later than the earlier of: (a) the first day of the next plan year, or (b) six months after satisfying such requirements (typically met by using semiannual entry dates of the first day of the plan year and the first day of the seventh month of the plan year, e.g., January 1 and July 1 for a calendar-year plan).

It is important to note that the LTPT years of service must be consecutive, not cumulative. Thus, if the LTPT works 500 hours in years 1 and 2, but only 300 hours in year 3, and then works 500 hours in year 4, that means year 4 becomes the first year counted in determining the next potential three consecutive 12-month periods.

Other retirement plan provisions affecting LTPTs

It is important to remember that other regular plan provisions may still apply to LTPTs. For example, let’s visit the 999-hour limitation for a moment. AN LTPT’s eligibility service is years with hours between 500 and 999. That is because once an employee has 1,000 hours in a 12-month period, they are no longer considered an LTPT and are covered under the plan’s regular year of service rules and may be eligible for participation sooner under the regular eligibility provisions. Additionally, if the plan has an age requirement for standard eligibility, that may also apply to LTPTs. Or the plan may choose to use the minimum age 21 requirement as allowed in the statute for these LTPTs even if an earlier age is used for other employees. AN LTPT could not enter the plan sooner than allowed under the normal eligibility conditions.

There are two areas for which we are awaiting guidance from the Internal Revenue Service (IRS). Plans cannot apply an excluded class of employees based on service. But if an LTPT is part of an excluded class of employees for another determining factor, such as division, location, job category, etc., then they could remain in the excluded class and not be allowed to enter the plan solely on the basis of being an LTPT if a full-time employee in the same position would also be similarly excluded.

Second, it is also unclear whether plans that use hours equivalencies or elapsed time methods of counting service could apply such methods to counting service for LTPTs, or if the counting of actual hours is needed for these employees.

If an employee is eligible to participate in the 401(k) plan solely because of the LTPT eligibility rule, plan sponsors and administrators may exclude LTPTs from coverage and the average deferral percentage (ADP) nondiscrimination testing.

Lastly, an LTPT employee does not have to be eligible to receive any employer contributions. This would include any employer matching, nonelective, top-heavy, or safe harbor contributions. The only requirement for an LTPT is that they are eligible to make 401(k) elective deferral contributions into the plan.

How did SECURE 2.0 affect the LTPT rules?

First off, the changes made to the LTPT rules in the SECURE 2.0 Act of 2022 did not eliminate the LTPT rules under SECURE 1.0. They just made changes moving forward. The LTPT provisions of SECURE 2.0 are effective for plan years beginning after December 31, 2024. And while the LTPT rules under SECURE 1.0 only applied to 401(k) plans, the revised LTPT rules under SECURE 2.0 also apply to 403(b) plans that are subject to ERISA. In addition, the 12-month periods beginning before January 1, 2023, are not counted for eligibility and vesting purposes.

SECURE 2.0’s revised LTPT rules shortened the eligibility service period for LTPTs from three consecutive 12-month periods with 500 hours to two consecutive 12-month periods with 500 hours. Based on the effective date of the first plan year beginning after December 31, 2024, this means for calendar-year plans that the first entry date of an LTPT with two consecutive years with 500 hours is January 1, 2025.

As mentioned, the Secure 1.0 three-year rule still applies. An LTPT who was hired in 2021 would need to satisfy the three-year rule and could participate on January 1, 2024. AN LTPT who was hired in 2022 could satisfy either the two-year or three-year rule and begin participating on January 1, 2025.

Vesting and SECURE 2.0 rules for LTPTs

Let’s talk vesting. If the employer chooses to provide employer contributions to an LTPT, or that LTPT later becomes eligible for employer contributions, counting vesting while an LTPT may also be different from the standard plan provisions. Participants who became eligible solely due to the LTPT rules receive a year of vesting service for each 12-month period in which they had at least 500 hours and are considered to have had a break in service if they did not complete 500 hours.

SECURE 2.0 made a technical correction to the LTPT vesting provisions of SECURE 1.0, clarifying that pre-2021 years are also excluded for counting vesting service. Lastly, a person who enters the plan as an LTPT and later becomes eligible under the standard full-time rules will always keep the 500-hour vesting service level.

What should plan sponsors do?

Plan sponsors should make sure they are tracking information on all employees, including part-time employees, and supplying it to their service providers. Recordkeepers and administrators are not able to calculate what they don’t receive. If your payroll or periodic data files do not include all employees, get that updated immediately.

Consider any plan design changes that may make administration easier. Will you use the plan’s current eligibility age provisions, or default to the statutory age 21 for LTPTs? Should you allow all employees to make elective deferral contributions immediately, but limit employer contributions to only those with at least 1,000 hours?

Plans must be amended for SECURE 1.0 and SECURE 2.0 provisions no later than December 31, 2026 (December 31, 2028, for collectively bargained plans, or December 31, 2029, for most governmental plans). A full summary of the amendment deadlines can be found here. Be sure to discuss the items listed here—and potentially others that may need to be considered—with your ERISA counsel or Milliman consultant.