Section 125 of SECURE 2.0 enhances coverage for long-term, part-time (LTPT) workers by lowering the service requirement for determining their eligibility. 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. This is a new requirement for ERISA 403(b) plans and a modification of the requirements for 401(k) plans.

Who is required to adopt?

Section 125 of the SECURE 2.0 Act requires plan sponsors of ERISA-covered 401(k) and ERISA-covered 403(b) plans to comply with the provision requirements effective for plan years beginning after December 31, 2024.

What are the requirements of Section 125?

The SECURE Act provision provides that – except in the case of collectively bargained plans – employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either 1 year of service (with the 1,000-hour rule) or 3 consecutive years of service (where the employee completes at least 500 hours of service). Section 125 reduces the 3 year rule to 2 years, effective for plan years beginning after December 31, 2024. ERISA 403(b) plan sponsors must operate their plans in accordance with both the long-term, part-time employee eligibility provision (Section 125) and 403(b) universal availability requirement.

Once a LTPT employee meets the 500 hours per year for 2 consecutive years, they will be considered eligible for vesting credits for those years of service. Any service performed prior to 2021 is not considered for vesting purposes when determining eligibility under Section 125.

Employers are not required to, but can opt to, make match or nonelective contributions to LTPT employees.

What steps should plan sponsors take to ensure compliance?

• Work with your plan’s third-party administrator and payroll service provider to become better educated regarding the LTPT employee requirements and to implement necessary system updates.
• Adjust payroll and recordkeeping systems to track and monitor hours of service for part-time employees and confirm that employees meeting the threshold are automatically enrolled in the plan.
• Review and update plan documents to reflect the reduced service requirements for LTPT employees and ensure vesting schedules align with the updated eligibility rules.
• Inform part-time employees of their updated eligibility requirements for plan participation, including any applicable vesting rules for employer contributions.

By proactively making these adjustments, plan sponsors can ensure compliance with SECURE 2.0 Section 125 and improve retirement plan access for long-term part-time employees.