Together, the SECURE Act and the SECURE 2.0 Act feature numerous changes to retirement plan rules that aim to help employees achieve retirement security by ensuring that more workers have access to retirement plans, can save enough money to maintain their standard of living in retirement and do not outlive their retirement savings.
Consistent with this goal, these laws broadened the retirement plan minimum eligibility rules—i.e., the rules that govern how long employees can be asked to wait before joining an employer’s retirement plan—to ensure that long-term, part-time employees can participate in employer 401(k) plans beginning as early as January 1, 2024, and 403(b) plans beginning as early as January 1, 2025. This means employers with 401(k) and 403(b) plans that rely on current rules to exclude employees from plan participation until the employees complete 1,000 hours of service in a year will need to change their enrollment processes to allow long-term, part-time employees to participate under this new rule.
Though well-intentioned, implementing the new rule has been fraught with complexity, driven in part by long-unanswered questions about how the requirement should be applied. Recently issued guidance provides insight about the rule and answers to many of those unanswered questions by:
Reminding employers that long-term, part-time employees include employees who work at least 500 hours for three consecutive years (reduced to two beginning January 1, 2025) and meet the minimum age requirement to participate in the plan;
Explaining that employers that maintain 401(k) or 403(b) plans must provide such employees the opportunity to make elective deferrals permitted by their plans, but they need not provide corresponding opportunities to receive employer contributions until the employees satisfy the regular plan rules;
Noting that the new rule does not apply to collectively bargained plans but does apply (subject to a request for further comments) to governmental plans and church plans;
Clarifying that the new long-term, part-time employee rule does not apply to plans that use elapsed time (rather than hours) to determine eligibility;
Confirming that employers can continue to exclude reasonable classifications of employees, even if those employees would otherwise be eligible to participate as long-term, part-time employees, provided the exclusions are not based on age or service;
Advising that service must be counted for purposes of satisfying the 500-hour rule for years beginning with 2021 (for 401(k) plans) and 2023 (for 403(b) plans);
Clarifying that employers can track hours for purposes of this rule using previously permitted equivalencies (e.g., 190 hours of service for each month)—there is no special equivalency rule for long-term, part-time employees—rather than actual hours;
Clarifying that the same eligibility computation period and entry date requirements apply to regular employees and long-term, part-time employees, meaning employers may use anniversary year or plan year measurement periods, and must have at least semiannual entry dates to allow employees to enter the plan after satisfying the eligibility requirements;
Advising that once a long-term, part-time employee becomes a participant by virtue of satisfying the required service period, the employee will remain in the plan even if the employee’s service level falls below 500 hours per year;
Explaining that a long-term, part-time employee is required to be credited with a year of vesting service if the employee completes 500 hours of service, and that this lower hours threshold continues to apply even if the long-term, part-time employee later becomes a full(er)-time employee;
Confirming that employers with safe harbor plans can choose not to make safe harbor contributions to long-term, part-time employees without jeopardizing the safe harbor status of their plans, but the exclusion must be set forth in the plan; and
Confirming that employers may elect to exclude long-term part-time, employees from annual coverage and nondiscrimination testing, and from receipt of any required top-heavy contributions or vesting.
The new guidance provides much-needed clarity around several key issues related to the treatment of long-term, part-time employees. However, with that new rule effective for 401(k) plans beginning January 1, 2024, the guidance leaves employers very little time to make changes to how their human resources information system providers and recordkeepers currently track hours for this purpose. As a result, it is imperative that employers review their existing eligibility-tracking processes as soon as possible to determine if changes are needed. Some employers may also want to continue exploring design changes that would help reduce the administrative burden associated with complying with the new rules.
For any questions regarding SECURE 2.0 changes, please contact your regular McDermott lawyer or one of the authors.