The IRS issued Notice 2024-73 (the Notice), which provides important updates on how section 403(b) retirement plans subject to the ERISA will be impacted by the rules governing long-term, part-time (LTPT) employees. Under the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, for plan years beginning after Dec. 31, 2024, LTPT employees who are at least age 21 and have at least 500 hours of service in each of two consecutive 12-month periods must be offered the right to participate in salary reduction agreements (i.e., contribute elective deferrals). Employers will no longer be able to require a longer period of service for these employees to become eligible to participate in the plan.
Impact on section 403(b) plans
Section 403(b) plans must meet various nondiscrimination and coverage requirements under section 403(b)(12) similar to section 401(a) plans. One of these rules, the universal availability rule, requires that if any employee is given the opportunity to make elective deferrals, then all employees must be given the opportunity to make elective deferrals (with exclusions for certain church plans). However, some unique exceptions apply, such as excluding students enrolled in and working at a school or part-time employees who normally work fewer than 20 hours per week. The new guidance clarifies how these exceptions interact with the new LTPT employee rules.
Eligibility rules for LTPT employees in 403(b) plans
Part-time employees: Section 403(b) plans subject to ERISA must provide part-time employees the right to contribute elective deferrals if the employee otherwise qualifies as a LTPT employee. This applies even if the plan has previously excluded part-time workers. However, plans can still exclude employees who do not meet the LTPT employee criteria, such as those who have not worked 500 hours in each of the required 12-month periods.
Student employees: The Notice provides that the student employee exclusion is not subject to this new rule. Accordingly, ERISA section 403(b) plans can continue to exclude student employees from making elective deferrals under the plan, regardless of whether the student qualifies as a LTPT employee.
Section 403(b) plans that are not subject to ERISA, such as certain governmental plans, are not required to follow these new LTPT employee rules. For example, a public school district's 403(b) plan, which is exempt from ERISA, would not be subject to the new requirements.
Implications for nondiscrimination testing and employer contributions
The guidance also provides flexibility for employers in how they handle LTPT employees concerning nondiscrimination testing and employer contributions. Employers may elect to exclude LTPT employees from specific nondiscrimination tests, such as those under sections 401(a)(4), 401(m)(2) and 410(b). Additionally, employers are not required to make nonelective or matching contributions for LTPT employees, even if other employees receive such contributions. This means that while LTPT employees must be allowed to contribute elective deferrals, employers have the option to limit the retirement benefits provided to them.
Special vesting rules for LTPT employees
The SECURE 2.0 Act also introduced special vesting rules for LTPT employees under ERISA section 403(b) plans. For vesting purposes, each 12-month period in which the employee works at least 500 hours will count as a year of service. However, this provision only applies to service periods beginning on or after Jan. 1, 2023. This rule ensures that LTPT employees who may not reach 1,000 hours annually can still accumulate vesting credits toward employer contributions.
Key takeaways
The updates in Notice 2024-73 clarify how the new LTPT employee rules under the SECURE 2.0 Act apply to ERISA section 403(b) plans. The notice allows employers to exclude LTPT employees from some requirements, such as nondiscrimination testing, while ensuring they are still eligible to participate in elective deferral arrangements. Employers will need to update their employee communications to reflect the new eligibility rules for LTPT employees. This will also require plan administrators to update their plan documents to reflect the new eligibility and vesting rules no later than the SECURE 2.0 Act amendment deadline of Dec. 31, 2026. Employers must operate under these rules even if their plan documents have not yet been formally amended.
The new rules outlined in Notice 2024-73 will take effect for plan years starting on or after Jan. 1, 2025. Employers should review their plan documents and practices to ensure compliance with these updated requirements before the effective date.
