New SECURE Act 2.0 Long-Term Part-Time Employee Rules

November 14, 2023

At a Glance

Main Takeaway

The original SECURE Act, signed into law in 2019, was designed to encourage employers to offer retirement plans such as the 401(k) and make it easier for employees to benefit from them.

A new version, the SECURE Act 2.0, was signed into law in December 2022. It added a range of new provisions expanding coverage for long-term part-time employees (LTPT).

Next Step

Learn how the SECURE Act 2.0 impacts your LTPT employees and how understanding the new requirements can help you stay compliant when designing and implementing employee benefit plans for your business.

What is the SECURE Act?

The Setting Every Community Up For Retirement Enhancement (SECURE) Act, now called the SECURE Act 1.0, was adopted in 2019 as part of the Further Consolidated Appropriations Act of 2020. The purpose of the SECURE Act was to allow more employees to receive retirement benefits, providing economic security for working Americans.

How Did the Original SECURE Act Work for LTPT Employees?

While you could offer 401(k) plans and benefits to LTPT employees before the SECURE Act, the law requires them to meet specific eligibility criteria. Historically, retirement plan administrators required part-time employees to work at least 1,000 hours in a given year to become eligible.

One of the provisions of the original SECURE Act is to reduce the hours worked requirement. Under the SECURE Act 1.0, you could offer a 401(k) plan to your LTPT employees if they met the requirements of the three-year rule: work at least 500 hours a year for three consecutive years.

The three-year rule applies starting with plan years beginning on or after January 1, 2021. To ensure LTPT employees could receive benefits, you were required to track employee hours to satisfy the new rule. However, no employer contributions were required, and employees had to fulfill the plan’s age requirements.

For example, if you offered an LTPT employee a 401(k) plan in 2021, they could become eligible to enter it in 2024 if they satisfy the following requirements:

Must have worked at least 500 hours per year in 2021, 2022, and 2023 to become eligible
Be at least 21 years of age to start making contributions to the plan

What Does SECURE Act 2.0 Change for Employers and Long-Term Part-Time Employees?

The SECURE Act 2.0, passed in 2022, builds on the original SECURE Act, aiming to improve retirement savings and accessibility for Americans. For LTPT employees, SECURE Act 2.0 provides even more benefits than its predecessor.

The Act offers a shortened eligibility wait time, extends rules to ERISA 403(b) plans, and introduces relaxed RMD rules, making it more advantageous for LTPT workers to participate in and benefit from retirement plans.

Here are some of the most notable changes:

401(k) plans in 2024 – Beginning in 2024, LTPT employees must be allowed to defer into a 401(k) plan. This ensures they can benefit from the deferred compensation mechanism available to other employees.

Elective deferrals exclusion – LTPT employees eligible for elective deferrals under the Secure Act 2.0 may be excluded from receiving other contributions, such as non-elective or employer-matching contributions. They can only access these benefits after meeting the specific plan’s eligibility requirements.

Vesting increases with service – For employees who receive contributions from their employers, contributions must increase once they work 500 or more hours in a year. This ensures they have a growing claim to these funds.

Service commencement in 2021 – When considering 3-year eligibility and vesting, only the service duration that began in 2021 and onwards is considered. This means no prior service is taken into account for these requirements.

Compliance tests exclusion – Under Section 310 of the SECURE Act 2.0, employers can test excludable and non-excludable employees separately for the top-heavy rule for retirement plan eligibility. This removes a financial deterrent, encouraging broader inclusion of employees in 401(k) plans for plan years starting after December 31, 2023.

Shortened eligibility wait time in 2025 – The SECURE 2.0 Act, starting from the plan year 2025, reduces the eligibility waiting period for LTPT employees in 401(k) plans. The wait time is now only two consecutive years instead of three, provided the employee is 21 years of age or older.

Vesting exclusions – Services provided by an employee before 2021 will not count toward their vesting considerations in the 401(k) plan.

Extension to ERISA 403(b) plans – The LTPT rules will apply to ERISA 403(b) plans for 2025. The service before 2023 is disregarded when determining eligibility and vesting for these specific plans. The Act also lays out provisions under ERISA, providing LTPT employees with an enforceable right to make salary deferrals under the rules established in ERISA Section 502.

Hours requirement for participation – LTPT employees must work a minimum of 500 hours to be considered for the benefits.

Design and Implement Compliant Employee Benefit Plans with Windes

The law and rules regarding employee benefits, such as retirement plans, are subject to constant changes and adjustments. These regulatory modifications can make implementing the right plans and packages challenging for retaining top talent, including long-term part-time employees.

The Employee Benefit Services (EBS) team at Windes can assist you. We follow the latest regulatory changes and can help you design and implement the right retirement plan for your company. We also offer Employee Benefit Plan Audit services to ensure your plans comply with all applicable laws and regulations, such as ERISA.