Employers, are you up to speed on the latest SECURE 2.0 provisions? The IRS has just released updated clarification on 403(b) plans and how long-term, part-time employees are treated for eligibility purposes. Here are the details.

What is a 403(b) plan?

Also known as a tax-sheltered annuity plan, a 403(b) plan is a retirement plan for employees of public schools, churches and tax-exempt 501(c)(3) organizations. Similar to a 401(k) plan, employees of these organizations can defer some of their salary into the plan’s investment accounts for retirement.

What’s new?

The IRS has issued Notice 2024-73, which provides guidance on the eligibility rules for long-term, part-time (LTPT) employees (in a plan subject to ERISA) under the SECURE 2.0 Act of 2022. Specifically:

• 403(b) eligibility has expanded to LTPT employees who work at least 500 hours per year for 2 consecutive years. Hours of service completed before January 1, 2023 will not be taken into consideration.
• The right to make elective deferrals must be provided to part-time employees qualifying as LTPT
• Clarification on the “universal availability requirement” whereas:
  • Part-time employees who work less than 20 hours per week must be allowed to contribute to the plan once they satisfy the requirements to be considered a LTPT employee
  • Plans that exclude student employees can continue to exclude them from contributing even after they become LTPT employees
• An amended nondiscrimination rule clarifies that employers are not required to make nonelective or matching contributions for LTPT employees (even if they provide these contributions for other employees eligible to participate in the plan).
• LTPT employees are now subject to a special vesting rule whereas each 12-month period for which the employee has at least 500 hours of service is treated as a year of service for vesting purposes.

What is the reason for the updates?

Part-time workers are a growing segment of the workforce. With these changes, the IRS hopes to make retirement plans more inclusive and accessible for all employees.

When will the rules be effective?

The new rules for long-term, part-time employees will be effective for plan years beginning after December 31, 2024.

What should employers do now to prepare?

Employers with 403(b) plans should review their plan design now to ensure compliance with the new rules. This review should include discussions with the plan’s third-party administrator, which might result in changes to administrative processes, benefits offerings and/or amendments to your plan document.

Comments?
The IRS is asking for public feedback on how these new rules should be applied, especially regarding long-term, part-time employees in 403(b) plans. You can send comments electronically through the Federal eRulemaking Portal at www.regulations.gov by searching for "Notice 2024-73." Comments will be accepted through December 20, 2024.