In its quest to Set Every Community Up for Retirement Enhancement, SECURE 2.0 enhanced the Long-Term Part-Time (LTPT) rules of Secure 1.0 by making them applicable to 403(b) plans. Since employees are more likely to contribute to an employer-sponsored retirement arrangement than an Individual Retirement Account, and more Americans are working part-time since the pandemic, SECURE 2.0 requires that employees who work between 500 and 999 hours for two consecutive years be permitted to defer into their 403(b) plans effective plan years beginning in 2025.
Until now, 403(b) plans have been able to exclude participants expected to work less than 20 hours a week on their first year of employment and who actually work fewer than 1,000 hours in subsequent eligibility computation periods. It seems that this exclusion will only be available on the first year of service and be overridden by the LTPT rules on the second year of the participant’s employment.
Additionally, employees who are students performing services for the organization have been permitted an exclusion that seems to be in jeopardy. Intuitively, it would seem that exclusions that are not based on hours-worked, such as the student-worker exclusion, would still be available as long as the plan still passes the coverage tests, but industry experts believe that a technical correction to the following language would be necessary:
“Subject to the conditions applicable under section 410(b)(4) and section 202(c) of the Employee Retirement Income Security Act of 1974, there may be excluded for purposes of this subparagraph employees who are students performing services described in section 3121(b)(10) and employees who normally work less than 20 hours per week.”
Lastly, it is not clear whether employers will be able to exclude LTPT employees whose deferral election does not exceed a $200 minimum.
While we wait for clarification from the Internal Revenue Service, ERISA 403(b) plan sponsors may want to consider gathering hourly records for student employees, in case they become necessary to properly implement the LTPT rules in two years.
