IRS Notice 2024-73 provides preliminary guidance regarding the application of the long-term part-time (LTPT) employee rule to 403(b) plans, including how the LTPT rule applies with respect to certain student and part-time employees. In addition, the notice provides that the final regulations related to LTPT employees in 401(k) plans will not be effective before plan years beginning in 2026.
The notice generally applies to plan years beginning after December 31, 2024.
For plan years beginning after December 31, 2020, except in the case of collectively bargained plans, the SECURE Act requires employers to include LTPT employees in 401(k) plans when they do either of the following:
SECURE 2.0 amended the eligibility requirements, beginning in 2025, to require coverage for employees who have worked at least 500 hours for an employer for two (instead of three) consecutive years, although years beginning before 2021 may be ignored for this purpose. SECURE 2.0 also expanded the LTPT rules to 403(b) plans but allows these types of plans to disregard eligibility service before 2023.
In addition, SECURE 2.0 changed the special vesting rules for LTPT employees so that 12-month periods beginning before 2021 for 401(k) plans and 2023 for 403(b) plans may be disregarded with respect to LTPT employees. All years of service after the applicable date with an employer maintaining the plan must be taken into account unless the plan excludes certain years of service (e.g., before the employee reached age 18).
Hence, for employees who are eligible solely by reason of the LTPT rule, each 12-month period for which the employee has at least 500 hours of service must be treated as a year of service for both eligibility and vesting purposes. Employers may exclude LTPT employees from non-discrimination tests unless the employee meets the plan’s age and service requirements that apply to full-time employees.
Unlike a 401(k) plan, a 403(b) plan may not exclude an employee from making deferrals solely because the employee has not been credited with 1,000 hours in a 12-month period. However, a 403(b) plan may exclude certain student employees and employees who normally work less than 20 hours per week (part-time employees) from making deferrals. These exclusions generally must be applied consistently to all employees in a particular category.
The IRS proposed regulations in November 2023 that focused on applying the LTPT rules to 401(k) plans. This proposed 401(k) rule noted that SECURE 2.0 extended the LTPT rule to 403(b) plans but did not specifically address how the LTPT rule applies to 403(b) plans.
The proposed 401(k) rule was effective January 1, 2024, but did not provide for a good-faith compliance period. Many practitioners believed this meant that beginning with the 2024 plan year, 401(k) plans had to comply with not only the requirements specified under the SECURE Act but also any additional requirements included in the proposed rule.
The LTPT requirement does not apply to non-ERISA plans. The notice confirms that the LTPT rule only applies to 403(b) plans that are subject to ERISA. As a result, non-electing church 403(b) plans and governmental 403(b) plans (including those maintained by public schools) are not subject to the LTPT rule.
The notice confirms that student employees are not subject to the LTPT rule, meaning they may be excluded from a 403(b) plan regardless of whether they meet the LTPT service requirement.
The notice provides that part-time employees are subject to the LTPT rule. Therefore, even if an employee normally works less than 20 hours per week, that employee must become eligible to make deferrals if the employee works at least 500 hours each year for two consecutive years.
The consistency rule will not be violated if a 403(b) plan excludes part-time employees from making deferrals if the part-time employee has not satisfied the LTPT rule.
If a part-time employee becomes eligible to participate as a LTPT employee but subsequently completes the plan’s standard eligibility requirements, the employee cannot be excluded from the employer contributions available to other employees solely on the basis of being a former LTPT employee. Nor can this type of former LTPT employee be excluded from the nondiscrimination tests for the employer contributions.
The notice delays the effective date of final regulations for applying the LTPT rules to 401(k) plans to plan years beginning on or after January 1, 2026 — but does not delay the effective date of the LTPT rules under SECURE or SECURE 2.0. Plan sponsors should consult with legal counsel if there are any questions regarding which aspects of the LTPT rule are in effect prior to the effective date of the regulations.
Finally, the notice confirms that the IRS will issue proposed regulations regarding the application of the LTPT rule to 403(b) plans, which the IRS expects to be similar to the final regulations for 401(k) plans. Therefore, it appears that the final LTPT regulations for 401(k) plans may be issued before proposed regulations are issued for 403(b) plans.
Sponsors of 403(b) plans that exclude student employees or employees who normally work less than 20 hours per week from making deferrals should review the notice and make any necessary updates to the plan’s operations and communications for compliance with the LTPT rule. Due to the complexity of compliance, 403(b) plan sponsors may want to consider allowing employees who normally work less than 20 hours per week to make deferrals without having to satisfy a service requirement.
