Employers have historically been allowed to exclude from their retirement plan employees who never worked at least 1,000 hours in a 12-month period. This shut out many part-time employees from an opportunity to set aside money for retirement.
Congress, however, has taken legislative action, spurred by concern about the level of
Now, the rules allowing employers to exclude part-time, seasonal, and temporary employees from 401(k) or 403(b) plans are changing. Companies will face additional administrative burdens to properly operate their retirement plan and a potential increase in costs.
New requirements mean greater tracking
401(k) plans: For the 2024 plan year, employers sponsoring a 401(k) plan must begin enrolling employees who would not otherwise be eligible for the plan and who are credited with more than 500 hours of service in three consecutive 12-month periods for purposes of contributing elective deferrals. These employees are referred to as long-term, part-time (LTPT) employees.
This requires employers to keep track of part-time employee hours back to 2021 in order to determine if the employee satisfies the conditions. Twelve-month periods beginning prior to Jan. 1, 2021, need not be counted.
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The following examples demonstrate the rule for plan years beginning in 2024:
- Since he was hired part-time in 2018, Oliver has never been credited with at least 1,000 hours in a year and was excluded from eligibility because of the 401(k) plan's 1,000 hour requirement. Oliver works 750 hours in 2021, 2022 and 2023. Under the new LTPT rule, he must be enrolled in the plan to make elective deferrals because he worked more than 500 hours in three consecutive 12‑month periods.
- Felicity is hired on June 13, 2021, and works 650 hours in each of her anniversary years ending June 12, 2022, 2023 and 2024. Her employer sponsors a calendar year 401(k) plan with entry dates of Jan. 1 and July 1. Felicity completed three consecutive 12-month periods with more than 500 hours on June 12, 2024, and must be enrolled in the plan on the next entry date, July 1, 2024.
These examples apply to 401(k) plan years beginning in 2025:
- Roy was hired in 2022. He worked 300 hours in 2022, and 650 hours in both the 2023 and 2024 plan years. He is eligible to enter the
401(k) plan in 2025 on the next plan entry date. - John was hired in 2022 and worked 550 hours in both the 2022 and 2023 plan years. However, he only worked 300 hours in 2024. John satisfied the two-year requirement in 2022 and 2023, so even though he did not work more than 500 hours in 2024, he is eligible to enter the 401(k) plan in 2025 on the earliest plan entry date.
403(b) plans: The same rules applicable to 401(k) plans for plan years beginning in 2025 apply to 403(b) plans. The difference is that periods beginning before Jan. 1, 2023, need not be taken into account when determining eligibility for the 403(b) plan.
The new LTPT rules have special implications for 403(b) plans. Unlike 401(k) plans, 403(b) plans are subject to a universal availability requirement requiring that all employees must be eligible for plan participation, with only a few permissible exclusions.
For example, 403(b) plans currently may exclude students enrolled in and employed by a school that offers a 403(b) plan. Additional IRS guidance may be required to determine if the student exclusion rule is overridden by the new LTPT provisions.
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How employers can adapt
The new LTPT rules will require employers to update their payroll and human resource information systems so that information is effectively compiled and available for compliance with the LTPT rule. Relevant questions include:
- Do payroll and HRIS systems accurately maintain hire dates and hours of service for part-time, seasonal, and temporary employees?
- Can the systems calculate hours of service equivalencies for LTPTs not paid by the hour?
- Can
eligibility information be pulled from the systems in time for LTPT employees to be notified of their eligibility and entry dates before deferrals commence? Are procedures in place for accurate information to be transmitted to the plan's third-party administrator or recordkeeper in a timely manner? - What cross-checking procedures can be put in place to help reduce the risk of plan operational failures and related plan corrections with respect to LTPTs?
- What procedures are necessary to maintain up-to-date contact information for LTPTs in light of their typically higher turnover rates?
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In addition, employers may consider the following actions:
- Make all employees eligible to make elective deferrals immediately upon hire, regardless of service, so that all employees are treated uniformly.
- Mitigate any additional burdens and costs resulting from the LTPT rules by reviewing existing job descriptions and schedules to assess whether a particular job requires more than 500 hours of service in a 12-month period.
- Review temporary positions that span two consecutive years, as well as the scheduling of seasonal employees who may return year after year — for example, during the retail holiday season—to determine whether they exceed 500 hours in consecutive years.
- Voluntarily provide matching or nonelective contributions for LTPT employees, including contributions under safe harbor 401(k) plans, for purposes of uniformity.
- Determine to what extent the mandatory enrollment of LTPT employees will increase the number of participants with small account balances.
- Assess whether LTPT enrollment would cause the plan to surpass the 100-participant threshold, thereby requiring an annual plan audit.
- If the employer decides to extend employer contributions subject to a vesting schedule to LTPT employees, ensure that each LTPT is credited with a year of vesting service for each 12-month period the LTPT has at least 500 hours of service.
Employers need to understand how the LTPT requirements will affect plan operations and what they must do now to be prepared for the changes.
