Stakeholders Ask for Enforcement Delay on Part-Time Eligibility Rules

The IRS in November 2023 issued guidance on the eligibility rules for long-term, part-time employees to participate in retirement plans. During an open comment period that closed Friday, several commenters asked for a good-faith compliance standard for the vesting rules described in the guidance.

Section 125 of the SECURE 2.0 Act of 2022 requires defined contribution plans to let long-term, part-time employees enroll in an employer-sponsored retirement plan if the employee has completed two consecutive years working at least 500 hours for the plan sponsor. This was a reduction from the three-year requirement created by the law’s predecessor, the Setting Every Community Up for Retirement Enhancement Act of 2019. An employee who works for 1,000 or more hours in a year is typically considered full-time for the purposes of plan eligibility.

SECURE 2.0’s requirement takes effect on January 1, 2025, meaning eligible part-time workers hired on January 1, 2023, must be made eligible to make elective contributions into the plan. Sponsors must therefore track part-time service to lawfully implement this requirement.

Vesting Changes

Facing questions about vesting schedules, the November IRS guidance specified that an employee accrues vesting credits for employer contributions if they work for at least 500 hours, but an employer may still decline to provide employer contributions to that part-timer. In practice, this means that if an employee starts off part-time and later becomes full-time, they will be granted vesting credits for their part-time work in years in which they worked at least 500 hours.

For example, an employer with a three-year cliff vesting schedule for employer contributions must make those contributions if an employee works part-time for two years and then becomes full-time for a full year after that. That same employee must also be made eligible to make elective contributions at the end of their second consecutive year working 500 hours or more.

As with service hours, sponsors are therefore required to track part-time service to lawfully implement this requirement.

Complicating Factors, Everywhere

The ERISA Industry Committee in its comment letter requested a good-faith compliance standard for this proposal. Though the proposal has not yet been finalized, sponsors may rely on its text as authoritative until a final rule is issued, according to the IRS. The U.S. Chamber of Commerce, a business advocacy group, also requested a good faith standard for no less than 12 months.

The American Retirement Association noted the technical difficulties in retroactively tracking service from part-timers hired in 2023 and vesting times for those not eligible for matching contributions. In light of this, the ARA asked for relief from enforcement action for all of 2024 until the first long-term, part-time employees actually become eligible under SECURE 2.0 in 2025.

The National Association of Government Defined Contribution Administrators requested a full exemption from the rule in its letter, asking alternatively for a two-year delay in the provision taking effect. The NAGDCA explained that “governmental plans encounter complexities in local law enabling requirements, payroll systems, and administration that most private sector employers do not face that justifies such a delay.”

As one complicating factor, the NAGDCA cited the fact that many governmental DC plans require eligibility for a governmental defined benefit plan first, and some of these DB plans exclude part-time employees altogether.

Since Section 125 of SECURE 2.0 does not speak to part-timers in DB plans, this would require government plans to dramatically change their structures, which often requires new state laws to be passed, explains Matt Peterson, the executive director of NAGDCA.

“Essentially, we are looking for a carve-out,” Peterson says, because of the unique designs of government plans and the potential need for new statutes.

According to an emailed statement from the IRS, “401(k) plan sponsors should review their employee census information to ensure they’ve identified all long-term part-time employees and provided them an opportunity to defer compensation to the 401(k) plan.”

The statement continued: “If any employees were not timely given the opportunity to make an elective deferral, the error may be corrected in accordance with the Employee Plans Compliance Resolution System.”

The IRS did not comment specifically on 403(b) plans, though they are also subject to Section 125. The IRS will be hosting a public hearing on the proposal on March 15.