Understanding the New Eligibility Requirements for Long-Term, Part-Time Employees

By Lisa Haberman, Ed.D., ChFC, CLU

Over the past five years Congress has passed extensive legislation to encourage more people to save for their retirement. One obstacle many people face in this endeavor is not meeting eligibility requirements to participate in an employer-sponsored 401(k) plan. This hurdle is now easier to overcome for people who have worked on a part-time basis for their long-term employer.

Historically, employers could require employees to work at least 1,000 hours during a year to become eligible to participate in a plan; so employees that work only part-time would never meet the plan’s eligibility requirements—therefore limiting the employee’s ability to save. In 2019, the SECURE Act of 2019 (SECURE Act) introduced provisions that allow long-term, part-time (LTPT) employees to make elective deferral contributions in an employer-sponsored plan by meeting certain less restrictive eligibility requirements. Three years later, the SECURE 2.0 Act (SECURE 2.0) shortened the time frame that LTPT employees need to work to gain entry into an employer’s retirement plan.

What are the requirements for a long-term, part-time employee to become eligible make elective deferral contributions?

The SECURE Act changed the eligibility requirements so that LTPT employees who are credited with at least 500 hours in three consecutive years must be allowed to participate under a 401(k) plan’s salary deferral provision; and 12-month periods beginning before January 1, 2021, are disregarded for this purpose. In 2022, SECURE 2.0 reduced the wait from three years to two, effective for plan years that begin after December 31, 2024, and expanded applicability to ERISA-covered 403(b) plans.

Who is considered a long-term, part-time employee?

In 2023, the Internal Revenue Service (IRS) released a proposed regulation reflecting the statutory changes introduced by the SECURE Act and SECURE 2.0. The proposed regulation provides clarity on the criteria that need to be met in order for an employee to be considered a LTPT employee.

LTPT Employee. Under the proposed regulation, a LTPT employee is defined as an employee who is eligible to participate in a plan solely by reason of

being credited with at least 500 hours of service during each of two consecutive 12-month periods (three consecutive 12-month periods for plan years beginning before 2025), and
attaining age 21 by the close of the last of the consecutive 12-month periods.

LTPT employees do not include employees described in Internal Revenue Code Section (IRC Sec.) 410(b)(3), including union employees and employees who are nonresident aliens with no United States source income. If an employee becomes eligible to participate in the plan under any other service condition (or lack thereof), the employee is not a LTPT employee. For example, if a newly-hired employee is immediately eligible to participate in the plan for deferral purposes, she will not be considered to meet the definition of a LTPT employee.

Class Exclusions. The proposed regulation confirms that certain classes of employees may continue to be excluded from participation in the plan, notwithstanding the LTPT requirements, so long as the class exclusions are not a proxy for imposing an age or service requirement that forces an employee to complete a period of service that extends beyond the earlier of

age 21 and one year of service, or
the applicable number of consecutive 12-month periods during each of which the employee is credited with at least 500 hours of service.

LTPT Entry Dates. A LTPT employee must be permitted to enter the plan under the same entry date rules that apply to all other eligible employees. This means a LTPT employee must be permitted to enter the plan the earlier of

the first day of the first plan year beginning after the date the employee satisfies the eligibility requirements, or
six months after the date the employee satisfies the eligibility requirements.

Employers may rely on the proposed regulations before the date final regulations are published.