IRS Proposed Rule on Long-Term, Part-Time Employees for Cash or Deferred Arrangements Under Section 401(k); Comments Due January 26
Published November 27, 2023
The Internal Revenue Service (IRS) and the Department of Treasury released a proposed rule amending the rules for 401(k) plans that include cash or deferred arrangements. The proposed rule provides guidance for long-term, part-time employees (LTPTE) and would affect participants in, beneficiaries of, employers maintaining, and administrators of plans that include cash or deferred arrangements.
The proposed rule reflects changes made by the SECURE Act and the SECURE 2.0 Act and affect coverage tests, nondiscrimination tests, top-heavy contributions, and vesting computations. Guidance in the proposed rule states that:
- An employee is an LTPTE only if the employee becomes eligible under a plan provision that matches the statutory LTPTE service requirement. Designing a plan to be more liberal in order to facilitate compliance with the LTPTE requirement means none of the special rules applicable to LTPTEs apply.
- An LTPTE will earn vesting service for years in which the employee performs 500 hours of service even if the employee doesn't receive employer contributions before earning 1,000 hours of service.
- An LTPTE who earns 1,000 hours of service (or is otherwise eligible for reasons other than as an LTPTE) will continue to accrue vesting service using the 500-hour per year rule.
- Job class exclusions remain permissible if they are not proxies for impermissible age or service requirements.
- Confirmation that the 12-month periods that are counted for LTPTE service begin on the hire date and may shift to the plan year.
The proposed rule clarifies that plan amendments to reflect eligibility changes (including discretionary changes to broaden eligibility beyond LTPTEs) do not need to be made until the last day of the 2025 plan year for non-governmental plans (2027 for governmental plan).