IRS Proposes Part-Time Eligibility Rules per SECURE Legislation

The Internal Revenue Service published a rule proposal on November 24 that would clarify the part-time eligibility requirements in the Setting Every Community Up for Retirement Enhancement Act of 2019 and the SECURE 2.0 Act of 2022.

The first SECURE Act legislated that part-time employees cannot be excluded from 401(k) plans if they worked for at least 500 hours in three consecutive 12-month periods.

David Ashner, an ERISA and tax attorney with the Groom Law Group, says that per the text of the SECURE Act, this provision came into effect on January 1, 2021, which means that as of January 1, 2024, employees who have served 500 or more hours each year in the meantime must be enrolled in plans unless they are disqualified for another reason.

SECURE 2.0, on the other hand, reduced the 500-hour requirement to two consecutive 12-month periods, rather than three, and took effect on January 1, 2023. This means that employees can become eligible under SECURE 2.0 starting on January 1, 2025. SECURE 2.0 also applies to 403(b) as well as 401(k) plans.

Vesting

According to the rules, employees can also earn vesting credits for employer contributions using the same logic. In other words, if a part-timer works at least 500 hours for a year and then becomes full-time for a year, or vice versa, an employer with a two-year vesting schedule must credit the worker for both years.

As Ashner explains, if the employer does offer contributions “and there’s a vesting schedule, an LTPT employee gets a year of vesting if they work 500 hours in a 12-month period. They can’t be required to work 1,000 for vesting purposes.”

Exemptions Still Good

Ashner explains that DC plan eligibility conditions based on employer classifications are still valid under the proposal, provided they are not merely a proxy to exclude participants based on age or service. For example, a class exemption for intern employees or for a branch of a business based in a college town—which effectively removes part-time or young adult participants by proxy—may be challenged by the IRS.

An eligibility condition may not have “the effect of imposing an age or service requirement,” says Ashner.

The comment period for the proposal runs until January 26, and there will be a public hearing on March 15. The proposal will be finalized some time after.

Ashner says the statutory requirement under the first SECURE Act is effective on January 1, 2024. He adds that “the proposed regulation is not technically effective; the regulation will need to be finalized after notice and comment before it can be made effective. But the proposed regulation reflects how the IRS is likely to interpret the statute (subject to any changes in the final rule), so plans should pay attention to the guidance.”