On October 3rd, 2024, the IRS issued Notice 2024-73, addressing how ERISA 403(b) plans must treat long-term, part-time employees (“LTPTEs”).
Background
SECURE Act 1.0 required ERISA 401(k) plans to accept contributions from LTPTEs and defined an LTPTE as an employee who worked at least 500 hours annually for three consecutive years and reached age 21 by the end of those three years.
SECURE Act 2.0 modified this LTPTE rule and extended it to ERISA 403(b) plans. Under SECURE Act 2.0, ERISA-covered 401(k) and 403(b) plans generally must accept contributions from employees who work 500 hours annually for two consecutive years and reach age 21 by the end of those two years. An employer is not required to make non-elective or matching contributions on behalf of employees who are eligible to participate in the plan solely because they are LTPTEs even if non-elective or matching contributions are made to other employees eligible to participate in the plan.
Guidance
Effective for plan years beginning after 2024, the Notice clarifies that ERISA 403(b) plans:
must accept contributions from LTPTEs, despite the Code permitting exclusion of employees who normally work less than 20 hours a week (unless another exemption applies);
may exclude certain student employees from participating, even if they qualify as LTPTEs;
may continue to exclude part-time employees who do not qualify as LTPTEs, notwithstanding the requirement that plans treat consistently all employees within an excludable class (e.g., part-time employees);
may exclude LTPTEs for purposes of non-discrimination testing of employer nonelective and matching contributions;
may not continue to exclude a former LTPTE who later becomes eligible to participate under standard eligibility conditions from receiving nonelective or matching contributions, or from nondiscrimination testing.
The IRS expects to propose regulations addressing LTPTEs in ERISA 403(b) plans that are similar to those regulating 401(k) plans. The final regulations addressing LTPTEs in ERISA 401(k) plans have not been issued yet (proposed regulations were issued on November 23, 2023), and the Notice announces those will apply to plan years that begin no earlier than January 1, 2026.
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