In late December 2023, the Internal Revenue Service (IRS) issued Notice 2024-2 (the Notice), providing guidance on key provisions of the SECURE 2.0 Act of 2022 (SECURE 2.0). SECURE 2.0, which was passed in December 2022, includes more than 90 provisions affecting US retirement plans, many of which are specifically aimed at enhancing savings opportunities for workers. The Notice provides guidance on many of the provisions of SECURE 2.0 in the form of questions and answers. This article covers the most significant provisions affecting 401(k) and 403(b) qualified retirement plans.
The Internal Revenue Service (IRS) has announced plans to initiate dozens of new audits this spring in an attempt to ground high-flying taxpayers and their personal usage of corporate aircrafts. These audits will focus primarily on “highest risk” corporations and large partnerships, IRS Commissioner Danny Werfel stated. Werfel added that audits of high-income earners will likely follow to “ensure that high-income groups are not flying under the radar.”
Under the SECURE Act and the SECURE 2.0 Act, employers must provide so-called long-term, part-time employees – i.e., those who complete at least 500 hours of service in three consecutive years (reduced to two years in 2025) and are at least 21 years old – the opportunity to make elective deferrals under their 401(k) plans and, beginning in 2025, their 403(b) plans.
Most employers with impacted plans reviewed their eligibility-tracking processes some time ago in anticipation of the initial effective date of the new rule. However, with that new rule now effective – and last-minute guidance now available – it is important for employers to review those processes to determine if further changes are needed or desired.
Under the SECURE Act and the SECURE 2.0 Act, employers must provide long-term, part-time employees the opportunity to make elective deferrals under their 401(k) plans and, beginning in 2025, their 403(b) plans. When this occurs, certain special rules apply to such employees that impact whether they must be included in annual nondiscrimination testing or receive required top-heavy vesting and benefits. As a result, it is important for employers to understand these requirements, as they may impact how annual testing is performed and the results.
Under the SECURE Act and the SECURE 2.0 Act, employers must provide long-term, part-time employees – i.e., employees who complete at least 500 hours of service in three consecutive years (reduced to two years in 2025) and are at least 21 years old – the opportunity to make elective deferrals under their 401(k) plans and, beginning in 2025, their 403(b) plans. However, long-term, part-time employees are not required to be eligible for employer matching or profit-sharing contributions until they satisfy the regular plan rules. Despite this fact, one of the most salient issues surrounding the implementation of the new rule is how it impacts – and complicates – tracking when employees become vested in such contributions.
Following the SECURE Act and the SECURE 2.0 Act, employers must now offer employees who work at least 500 hours within three (reduced to two beginning January 1, 2025) consecutive 12-month periods an opportunity to make elective deferrals to their 401(k) plans and, beginning in 2025, their 403(b) plans. This new long-term, part-time employee rule modifies rules that previously allowed employers to exclude employees from plan participation until the employees completed 1,000 hours of service in a single 12-month measurement period.
In doing so, the new rule has generated questions about whether all employers will now be required to track the actual hours all employees work to ensure compliance with this rule. The recently proposed regulations released by the Internal Revenue Service (IRS) confirm, in what should be a relief to many employers, that the answer is no. Employers do not need to change how they count periods of service toward plan eligibility. However, employers should revisit how such service is currently counted under their plans and consider the impact that may have on if and how the long-term, part-time employee rules apply.
Together, the SECURE Act and the SECURE 2.0 Act require employers to offer employees who work at least 500 hours within three (reduced to two beginning January 1, 2025) consecutive 12-month periods an opportunity to make elective deferrals to their 401(k) and, beginning in 2025, their 403(b) plans. In doing so, the new rule raises numerous questions about how the new service requirement should be tracked. This includes questions about what 12-consecutive month period (often referred to as a “computation period”) employers should use to determine if an employee has completed the requisite service to begin participating in the plan.
Under the SECURE Act and SECURE 2.0 Act, employers must provide long-term, part-time employees the opportunity to make elective deferrals under their 401(k) plans and, beginning in 2025, their 403(b) plans. Under the new rules, long-term, part-time employees include those employees who complete at least 500 hours of service in three consecutive years (reduced to two years in 2025), are at least 21 years old and enter the plan solely because they satisfy this requirement.
When this occurs, certain special rules apply to such employees, including rules that impact when employees become vested and whether such employees must be included in annual nondiscrimination testing or must receive top-heavy vesting and benefits. As a result, many employers have asked whether employees who enter the plan as long-term, part-time employees are always treated like long-term, part-time employees or if that can change throughout the course of their careers. The answer is, well, complicated, and the impact differs depending on whether the employer is applying the special vesting or nondiscrimination and top-heavy rules to such employees.
Under the SECURE Act and the SECURE 2.0 Act, employers must provide long-term, part-time employees the opportunity to make elective deferrals under their 401(k) plans and, beginning in 2025, their 403(b) plans. This new rule is fraught with complexity and has generated numerous questions about how the requirements apply. But in talking about the new rule, we often do so in simpler terms by focusing on the anticipated impact on employees working more than 500 hours (often thought of as the new eligibility threshold) but less than 1,000 hours (often thought of as the old eligibility threshold).
For the most part, that’s fine. In fact, doing so provides a helpful and, in some cases, necessary shorthand for discussing the primary differences between the long-understood old eligibility rule and the more complicated new one. However, because certain special rules apply to employees who enter an employer’s plan as long-term, part-time employees, it is important for all employers to understand when an employee is a long-term, part-time employee.
Beginning in 2024, employers and plan sponsors will need to implement new minimum eligibility rules, enacted by the SECURE and SECURE 2.0 Acts, that significantly expand eligibility for long-term, part-time employees to participate in employer-sponsored retirement plans.
The new rules require that employers who maintain such plans provide employees who work at least 500 hours for three consecutive years (reduced to two in 2025), and are at least age 21, the opportunity to make elective deferrals under their 401(k) plans beginning in 2024 and their 403(b) plans beginning in 2025. This change has generated numerous questions about what employers need to do to comply.
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