On October 3, 2024, the U.S. Internal Revenue Service (IRS) issued Notice 2024-73 (Notice) providing further guidance regarding long-term, part-time employees (LTPTEs) in Internal Revenue Code (Code) Section 403(b) retirement plans, which are plans offered by public schools, certain charities, and other tax-exempt organizations and announcing a delayed applicability date for the final LTPTE regulations applicable to 401(k) plans.
Historically, the Code has allowed 401(k) plans and 403(b) plans to exclude employees from eligibility until the later of (1) attainment of age 21 and (2) completion of a 12-month period during which the employee has at least 1,000 hours of service, which in practice allowed plan sponsors to exclude many long-term, part-time employees from plan participation. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the SECURE 2.0 Act of 2022 (SECURE 2.0) reduced the service requirement for LTPTEs. In late 2023, the IRS released proposed regulations regarding eligibility requirements for LTPTEs participating in cash or deferred arrangements under Section 401(k) of the Code.
LTPTEs in 403(b) Plans
Pursuant to the changes required by SECURE 2.0, for plan years starting on or after January 1, 2025, employees who complete at least 500 hours of service during each of two consecutive 12-month periods and attain age 21 by the last of the 12-month periods will meet the definition of LTPTEs and must be eligible to participate in a 403(b) plan.
With regard to elective deferrals, 403(b) plans must provide the right to make elective deferrals to LTPTEs unless another statutory exclusion applies. For example:
- The Notice confirmed that 403(b) plans may exclude student employees from making elective deferrals regardless of whether they qualify as an LTPTE.
- 403(b) plans may exclude part-time employees who do not qualify as LTPTEs without violating the consistency requirements of the Section 403(b) regulations.
The Notice also states that an employer with an Employee Retirement Income Security Act (ERISA) 403(b) plan can exclude LTPTEs from determinations about whether matching contributions satisfy nondiscrimination requirements. Section 403(b) plans that are not subject to Title I of ERISA are not subject to the LTPTE eligibility rules.
Future Guidance and Delayed Effective Date of Final 401(k) LTPTE Regulations
The IRS stated that it anticipates issuing proposed regulations with respect to Section 403(b) plans that are expected to be similar to the final regulations regarding 401(k) plan LTPTEs.
The Notice also confirms that the forthcoming final regulations regarding LTPTEs participating in Section 401(k) plans will apply only to plan years beginning on or after January 1, 2026.
