Now that the Long-Term, Part-Time (LTPT) Rules are Effective, What Exclusions are still Available to 403(b) Plans?

403(b) Plan Eligibility Exclusions Before SECURE 2.0

403(b) plans are bound by a universal availability mandate, whereby if one employee has the opportunity to defer, all employees must have the opportunity to defer. Since 1989, the universal availability mandate could be subject to the following exceptions, which allowed 403(b) plans to exclude:

1. Student employees;
2. Nonresident aliens;
3. Employees who are eligible under another 401(k), 403(b), or governmental 457(b) plan of the same employer;
4. Employees who normally work fewer than 20 hours per week. This last exception, which excludes part-time employees based on hours-worked, is affected by the LTPT Rules of the SECURE Act.

403(b) Plan Eligibility Exclusions After SECURE 2.0

The SECURE 2.0 Act enacted LTPT rules for 403(b) plans effective for plan years beginning after December 31, 2024, (January 1, 2025 for calendar year plans), requiring that employees who work between 500-999 in each of two consecutive eligibility periods be permitted to contribute elective deferrals to the plan, even if they were excluded before 2025 because they typically work fewer than 20 hours per week. It means that the “typically works fewer than 20 hours per week” exclusion only works for two years, if the employee works between 500-999 hours, and they are not covered by one of the other three exclusions.

IRS Notice 2024-73, explains that the LTPT rules do NOT supersede the other three exceptions to the universal availability rule, such that students, nonresident aliens, and employees eligible to other plans can still be excluded from the plan, as long as the exclusions are applied consistently to all employees who still meet each category. See our previous blog post Long-Term, Part-Time (LTPT) Guidance for 403(b) Plans for additional details.

Once-In, Always-In

The Once-In-Always-In (OIAI) Rule dictates that once an employee meets the eligibility requirements of a 403(b) plan, either the LTPT eligibility requirements or the regular ones, the employee will permanently retain the right to make elective deferrals, even if their hours fall below the required 500 hours for LTPT or 1,000 hours for regular eligibility. For interesting background and history behind the Once-In, Always In rules, see our old blog post Are Your Part Time Employees “In or Out” OR “In and Out?”

Employer Contributions Not Required, but Permitted/LTPT Inclusion in the Testing Sometimes Required, Sometimes Permitted

Employer contributions are not required for LTPT employees, including safe harbor and top-heavy contributions, (the top-heavy test does not apply to 403(b) plans), but if the plan sponsor chooses to make employer contributions on behalf of LTPT employees:

• the employer can choose to exclude the LTPT employees when performing the required discrimination testing of the employer contributions, for as long as they are LTPT employees. However, if LTPT employees are excluded from one test, they must be excluded from all tests. Additionally, all LTPT employees must be included or excluded from the testing;
• hours of service performed by LTPT employees on and after Jan. 1, 2023 must be taken into account in determining their vested interest in such employer contributions (500 hours equals one year of vesting);

Former LTPT Employees and Vesting: Nobody Said Life Would Always be Fair

LTPT employees who meet the regular eligibility criteria (typically 1,000 hours) in a later year will never again be an LTPT employee. Their new designation is “Former LTPTs”. Former long-term, part-time employees cannot be excluded from employer contributions or discrimination testing, but they continue to vest in employer contribution at the rate that LTPT employees vest: each 12-month vesting computation period (starting on or after January 1, 2023), in which the employee works at least 500 hours will count as a vesting year of service. Please see our previous blog Long-Term, Part-Time Employee Administration for examples of a vesting computation.

Many industry practitioners find it unfair that Former LTPT employees are credited with a year of vesting after 500 hours, while similarly situated, non-LTPT eligible employees are likely required to work double, 1,000 hours, to achieve the same vesting. Plan sponsors who are bothered by this inequity have the option of amending the plan to require 500 hours in a vesting service period for all eligible participants. Don’t Raise the Bridge, Lower the Water.

When Hours Worked are Not Available

But I pay my part-time employees by the task, or by the day.

For employees who are paid by the day or by the task, employers may not have the number of hours worked. In those cases, the plan document can choose a permitted equivalency method to determine eligibility by crediting:

• 10 hours per day
• 45 hours per week
• 95 hours semi-monthly
• 190 hours per month

Other options, such as 8 hours per day or 40 hours per week are not available. Under each equivalency method, the employee is attributed the entire equivalency, even if only one hour was worked during that day, week, semi-monthly period, or month.

Avoiding the LTPT Rules

Favorable Eligibility Provisions: Any eligibility provision that allows plan entry at or before 500 hours of service avoids the LTPT rules:

• Immediate eligibility
• Two months of service – equivalency method
• Three months of service – equivalency method
• 500 hours of service in twelve months
• The elapsed-time method: maybe

The Elapsed-Time Method

Plan sponsors and practitioners tend to think that choosing the elapsed-time method eliminated the possibility of having LTPT employees, but it is not a guarantee. Using the elapsed time method also avoids the LTPT rules for most employees, since the employee only needs to be employed at the beginning and the end of the eligibility computation period, without regard to hours actually worked, equivalencies, or even periods of absence during a twelve-month period. However, employees who do not meet the elapsed-time method requirements, because they leave and come back more than 12 months later, could still meet the LTPT requirements by working 500-999 hours two years in a row, separated by a 13-month period of absence that straddles the two plan years.

For example:

• 1/1/2023 – Date of Hire (DOH)
• 7/1/2023 – Date of Termination (DOT) after working 501 hours
• Break in Service
• 8/1/2024 – Date of Rehire (DORH)
• 12/31/2024 – 501 hours worked

The above employee would be an LTPT employee in a plan that uses the elapsed time method to determine eligibility.

If you’re thinking that the above situation would almost certainly have been an inadvertent improper exclusion in your case, don’t fret. The IRS’s correction program, the Employee Plan Compliance Resolution System (EPCRS), found in Revenue Procedure 2021-30 has standard pre-approved correction methods for improper exclusions, since they are a common mistake.

Mistakes Happen: Correcting Improper Exclusion of LTPT Employees

If an employee is inadvertently excluded, EPCRS correction procedures generally require that the employer deposit a percentage of the omitted deferrals plus 100% of the missed match, as applicable. Employers cannot ask the employees how much they would have contributed had they been given the opportunity to defer. For 403(b) Plans and 401(k) Safe Harbor Plans, Revenue Procedure 2021-30, Appendix A.5(6) provides a safe-harbor computation for the omitted deferrals to be the greater of:

• 3% of eligible compensation, or
• the maximum deferral percentage for which the employer provides a 100% match contribution (or greater)

The following chart summarizes the corrective contributions required if an LTPT employee is improperly excluded.

How Will the Auditors Test LTPT Administration?

1. The auditor will isolate employees who worked between 500 and 999 hours in plan years beginning in 2023 and 2024.
   1. If eligibility periods switch from the first year of employment anniversary to the plan year, the auditor will take it into account for new employees
2. For a sample of LTPT employees, the auditor will request evidence that the participants were given the opportunity to defer.
   1. Election forms are a best practice, but auditors might be willing to accept any evidence that the employees were informed of their eligibility, including emails, invitations to enrollment meetings, or signed policy manuals.

An Ounce of Prevention is Better than A Pound of Cure

Be prepared. Both small and large 403(b) plan sponsors should perform the steps that the auditors will or would take to ensure that they properly identify LTPT employees. In most cases, LTPT employees will decline to participate when given the choice, but the employer cannot assume what they would do. It’s important to keep records that LTPT employees were given the opportunity to defer when they became eligible. Document, document, document so that you can show off your best practices to your friendly financial statement auditor and if necessary, a government auditor or investigator. An ounce of prevention is better than a pound of cure.