November 2023

Author: Steven Grieb


On November 24, 2023, the Internal Revenue Service (IRS) proposed new regulations relating to vesting and eligibility rules for long-term, part-time (LTPT) employees. The regulations contain a number of clarifications to a new rule that was established under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0), and amended under the SECURE 2.0 Act of 2022 (SECURE 2.0). The rule won't impact defined benefit plans and defined contribution plans that don't allow for elective deferrals. However, the proposed regulations will have a significant impact on 401(k) and ERISA-governed 403(b) plans.

Evolution of the eligibility rules

Prior to SECURE 1.0, the Internal Revenue Code (the Code) generally required that a retirement plan couldn't impose an eligibility waiting period longer than one year of service. A year of service is a 12-month period during which the employee works at least 1,000 hours. For employee elective deferrals only, SECURE 1.0 amended the Code by requiring plans to have a maximum waiting period that is the earlier of a year of service or three consecutive years with at least 500 hours of service. For purposes of calculating eligibility years with at least 500 hours, years prior to 2021 can be disregarded.

For employer contributions, the eligibility rules remain the same. Plans can still require a full year of service before an employee becomes eligible for any employer contributions to the plan, including safe harbor contributions. However, if the LTPT employee is eligible for elective deferrals, they may be allowed to make catch-up contributions (if the LTPT employee is over 50, and the plan allows for catch-up contributions) and make Roth contributions (if the plan allows for Roth contributions).

SECURE 2.0 amended the SECURE 1.0 rule in several ways. First, SECURE 2.0 included the new eligibility rule within the text of the Employee Retirement Income Security Act (ERISA). Consequently, the new eligibility standard will apply to ERISA governed 403(b) plans starting in 2025. Additionally, SECURE 2.0 will shorten the eligibility requirement by allowing employees to defer after only two consecutive years with at least 500 hours, starting in 2025. Finally, SECURE 2.0 clarifies that years with at least 500 hours that occurred prior to 2021 also won't count for purposes of vesting (in addition to eligibility).

Between the rules adopted under SECURE 1.0 and their adjustments under SECURE 2.0, plan administrators have significant questions about how to administer the new eligibility rule. The proposed regulations address several of these pressing questions. While the guidelines are merely proposed at this point, they expressly state that plans may rely on them beginning with the 2024 plan year.

Which employees are subject to the new eligibility rules?

One of the biggest questions plan administrators had is which employees would have to be allowed to defer into the plan after earning the required number of consecutive years with at least 500 hours. The statute makes clear that, if a plan excludes union employees or non-resident aliens, those employees need not be allowed to defer regardless of how long they are employed, nor how many hours they work. However, substantial questions persisted about which employees must be subject to the new rule, and which employees could be excluded entirely.

The proposed regulations make clear that retirement plans can still exclude employees using eligibility conditions that aren't based on age or service. For example, plans can exclude anyone employed within a specified job classification. However, plans cannot completely exclude any employee based on anything that's "a proxy for imposing an age or service requirement." In other words, if an exclusion has the effect of imposing an age or service requirement, the employee must be allowed to defer upon the earlier of earning a year of service or earning the requisite number of years with at least 500 hours of service. When an LTPT employee works in an excluded class, but moves to an included class, years with at least 500 hours while working in the excluded class must count toward the employee's eligibility.

Consequently, participants can be excluded from plan participation entirely based upon factors such as which division they work for or their job location. However, any employee in a job classification defined by how much or how little they work (such as part-time employees, temporary employee or seasonal employees) would need to be allowed to defer after the required number of years with at least 500 hours.

Classifying LTPT employees

The proposed regulations allow plans to exclude LTPT employees from nondiscrimination testing — including coverage testing, Actual Deferral Percentage (ADP) testing for elective deferrals, Actual Contribution Percentage (ACP) testing for matching contributions and rate group testing for non-elective contributions. If a plan excludes LTPT employees from one of these tests, the plan must exclude LTPT employees from all of those tests. Plans cannot exclude only some LTPT employees from the testing. If the plan excludes one LTPT employee from the tests, all LTPT employees must be excluded. LTPT employees must be included in the top-heavy test, but plans need not give those LTPT employees a top-heavy minimum contribution.

Because of the testing rules, the regulations include detailed rules and examples indicating who is and who isn't a LTPT employee. Any employee who has worked a full year of service isn't an LTPT employee. Only employees who are eligible to defer solely due to working the requisite number of consecutive years with at least 500 hours qualify as LTPT employees. If an LTPT employee eventually earns a year of service, they cease to be an LTPT employee and must be included in nondiscrimination testing going forward. Employees who become eligible under a plan that has a waiting period shorter than what is otherwise required for LTPT employees under the Code (meaning, there is a faster eligibility period) won't also be an LTPT employee and will be included in nondiscrimination testing.

Initial eligibility for LTPT employees

The regulations also address which 12-month periods may be used to count the 500 hours. The rules follow the same standards used for other eligibility determinations. As a result, the 12 months following the employee's hire date must be a year. With respect to following years, the plan may elect to continue using anniversary years or switch to the plan year. Plans will most likely choose to rely on the same rule they use for determining whether an employee has worked a year of service.

Using the plan year for subsequent years could allow employees to become eligible much more quickly. For example, suppose a part-time employee is hired on December 1, 2023. The plan has a calendar plan year. If the part-time employee works at least 500 hours between December 1, 2023 and November 30, 2024 and at least 500 hours in calendar year 2024, the employee becomes eligible for elective deferrals as of January 1, 2025. That's just 13 months after their hire date. Once an LTPT employee has earned the required number of 500 hour-years, they must be allowed to continue deferring, even if they work less than 500 hours in a future year.

Plans that use elapsed time to determine eligibility generally won't have to concern themselves with the new eligibility rule and won't have any LTPT employees. Plans are still allowed to use an hour equivalency (e.g., 10 hours counted for every day worked) and may use it to determine LTPT employee eligibility. Plans that use an hour equivalency must allow employees to defer once they have at least 500 credited hours in the appropriate number of consecutive years.

Likewise, the proposed regulations use the same entry dates for LTPT employees as for other employees. Once an LTPT employee earns the required number of years with at least 500 hours, their entry date must be the earlier of the beginning of the next plan year, or six months following the date they meet the eligibility requirement. Earlier entry dates are, of course, permitted.


Under SECURE 1.0, any year during which an LTPT employee earns at least 500 hours counts for purposes of vesting service. SECURE 2.0 clarified that years prior to 2021 won't count for vesting purposes. Of course, once an LTPT employee works the requisite number of years with at least 500 hours, ERISA and the Code requires them to become eligible for elective deferrals only. Elective deferrals must be 100% vested at all times. So the vesting years of service will become relevant only if the LTPT employee eventually meets the plan's applicable eligibility requirement for any employer contributions.

The proposed regulations specify that the plan may use any 12-month period for counting the 500 hours that generally is permitted under the Code. Plans are allowed to use anniversary years for vesting purposes, but most commonly use plan years.

Once the LTPT employee earns a full year of service, they will no longer be an LTPT employee. And they will become eligible for employer contributions (if they were not already). Any years worked with at least 500 hours while the employee was an LTPT employee counts as a year of vesting service. However, the former LTPT employee will continue to earn future vesting years of service using the 500 hour per plan year rule.

Gallagher insight

While the new IRS guidance is welcome, it doesn't give plan sponsors much time for making any needed administrative changes to help ensure compliance. If an LTPT has at least 500 hours in 2021, 2022 and 2023, they must become eligible to defer into the plan for the 2024 plan year. That means these regulations were issued less than 40 days before the first LTPT employees can become eligible. Some of the IRS guidelines could impose significantly heavier administrative burdens (such as the vesting rules for LTPT employees who later earn a year of service).

Plan sponsors should understand quickly how the new proposed regulations could impact their plans and communicate with their record-keepers to confirm that those service providers can help them comply with the new rule.

Your Gallagher consultant will keep you apprised of any further IRS developments relating to LTPT employees.

Author Information


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