Long-Term Part-Time Employee Rules: Action Steps for Plan Sponsors

By: Angela M. Stockbridge

Key Takeaways

• The SECURE 2.0 Act reduced the long-term part-time (LTPT) employee eligibility period from three years to two consecutive years (500+ hours each), effective for plan years beginning on or after January 1, 2025.
• ERISA-covered 403(b) plans are now subject to LTPT rules for the first time, effective for plan years beginning after December 31, 2024.
• Plans must be reviewed—and likely amended—to ensure compliant LTPT provisions are reflected in plan documents.
• Plan administrators must have procedures in place to track part-time employee hours dating back to January 1, 2023.
• Employers are not required to provide matching or nonelective contributions to LTPT employees, but should confirm their plan's terms.
• Special vesting rules apply: each 12-month period in which an LTPT employee works 500 or more hours counts as a year of vesting service.

Background

Prior to the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), 401(k) plan sponsors could generally exclude employees who had not satisfied a one-year-of-service requirement (meaning 1,000 or more hours in a 12-month period) from plan participation. As a result, many employees working reduced schedules were indefinitely locked out of employer-sponsored retirement savings.

The SECURE Act changed this landscape by requiring 401(k) plans to permit long-term part-time employees to make elective deferrals beginning with the first plan year after December 31, 2020. Under the original rule, an LTPT employee was defined as one who had completed at least 500 hours of service in each of three consecutive 12-month periods. Critically, service before January 1, 2021, was excluded from the three-year count, meaning the first cohort of LTPT employees became eligible for elective deferral contributions no earlier than January 1, 2024 (i.e., after completing 500+ hours in each of 2021, 2022, and 2023).

Congress revisited the LTPT rules in the SECURE 2.0 Act of 2022 (SECURE 2.0), which made several significant modifications described below.

SECURE 2.0 Act Changes: What Is New for 2025

SECURE 2.0 made three important modifications to the LTPT rules, each of which carries plan document and administrative implications.

Two-Year Eligibility Period

Effective for plan years beginning on or after January 1, 2025, the eligibility measurement period is reduced from three consecutive years to two consecutive 12-month periods in which an employee completes 500 or more hours of service. Consequently, the initial class of employees eligible under the two-year rule comprises those who completed 500+ hours in both 2023 and 2024, making them eligible as of January 1, 2025 (for calendar-year plans) or the first day of the first plan year beginning in 2025 (for non-calendar-year plans). Service before January 1, 2023 continues to be disregarded for purposes of the two-year measurement period.

Extension to ERISA-Covered 403(b) Plans

Perhaps the most significant structural change under SECURE 2.0 is the extension of LTPT rules to ERISA-covered 403(b) plans for plan years beginning after December 31, 2024. Prior to this change, only 401(k) plans were subject to LTPT requirements. Sponsors of nonprofit, hospital, and educational institution 403(b) plans should assess whether their plans have been properly amended and whether administrative systems are in place to track part-time hours. Note that non-ERISA 403(b) plans (such as governmental 403(b) plans and certain church plans) are not subject to these requirements.

Vesting Credit for LTPT Employees

Under both the original SECURE Act and SECURE 2.0, each 12-month period during which an LTPT employee works 500 or more hours must be credited as a year of vesting service. This requirement applies regardless of whether the plan uses the elapsed-time or hours-of-service method for vesting purposes for other employees. Plan sponsors and administrators must ensure that vesting service is tracked correctly for LTPT participants beginning with the first year they are credited (i.e., 2021 for the three-year rule and 2023 for the two-year rule).

Identifying LTPT Employees

The LTPT rules apply to employees who satisfy the hour thresholds but have not otherwise met the plan's regular eligibility conditions (typically 1,000 hours in a 12-month period). In practice, plan sponsors must track hours for all part-time and variable-hour employees—even those they have historically excluded from participation—and identify individuals who crossed the 500-hour threshold in two consecutive years.

Relevant administrative considerations include:

• Measurement periods: The 12-month measurement periods may be plan-year based or anniversary-date based, consistent with the plan's existing eligibility methodology.
• Entry dates: Once an LTPT employee satisfies the two-year condition, the plan must provide a reasonable entry date. Plans using semi-annual entry dates are permissible; daily entry dates are also common.
• Union and collectively bargained employees: LTPT rules apply to employees generally; however, plan sponsors should confirm whether collectively bargained employees are covered by the plan.
• Rehired employees: Plans should have procedures for tracking prior service for rehired employees who may qualify as LTPT employees upon return.

Plan Document Requirements

Plans that have not already been amended to reflect the LTPT rules should prioritize doing so. The IRS has generally provided that plan amendments implementing SECURE Act and SECURE 2.0 provisions may be adopted by a deadline tied to the later of the last day of the plan year in which the change is effective or a date specified by the IRS. Sponsors should confirm current deadlines with counsel, as the IRS may update these dates.

Key plan document considerations include:

• Eligibility provisions: The plan's eligibility section must be updated to reflect the LTPT rules, including the two-year/500-hour threshold and the applicable exclusions.
• Exclusions for employer contributions: SECURE 2.0 continues to permit plans to exclude LTPT employees from receiving matching or nonelective employer contributions. Plans that wish to maintain this exclusion must include appropriate language.
• Vesting provisions: The plan must credit vesting service for each 500-hour year, regardless of whether the LTPT employee is otherwise entitled to employer contributions.
• Pre-approved plans: Sponsors using pre-approved (volume submitter or prototype) plan documents should confirm that their document provider has issued LTPT-compliant language and ensure that any required adoption agreements have been completed.

Employer Contributions and Top-Heavy Considerations

Plan sponsors are not required to provide matching or nonelective employer contributions to LTPT employees. Many plans will exclude LTPT employees from employer contribution formulas entirely, at least initially. However, sponsors should be aware of the following considerations:

• If the plan provides employer contributions to LTPT employees, those contributions must comply with all applicable nondiscrimination requirements.
• LTPT employees who are excluded from employer contributions are generally excluded from top-heavy minimum contribution obligations, unless they satisfy the plan's regular eligibility conditions in a subsequent year (i.e., they complete 1,000 hours in a 12-month period).
• Once an LTPT employee transitions to "regular" status by satisfying the plan's standard eligibility requirements, they become subject to all plan terms—including any employer contribution formulas—on the same basis as other participants.
• ADP and ACP testing: LTPT employees who make elective deferrals must be included in ADP testing and, if applicable, ACP testing. Their inclusion may affect testing results, particularly for plans with large part-time workforces.

IRS Regulatory Guidance

The IRS has issued several pieces of guidance to assist plan sponsors in implementing the LTPT rules:

• Notice 2020-68 (Q&A-13 through Q&A-16): Provided initial Q&A guidance on the SECURE Act LTPT rules, clarifying key definitional and administrative questions, including the treatment of service periods and the interaction with existing eligibility provisions.
• Proposed Regulations (REG-104194-23, published November 24, 2023): The IRS issued proposed regulations under Internal Revenue Code Sections 401(k) and 403(b) addressing the LTPT employee requirements in detail, including rules for tracking service, coordination with existing eligibility rules, and application to 403(b) plans. Plan sponsors may rely on these proposed regulations pending finalization.
• Notice 2024-2 (Section IV): Provided additional transition relief and clarification on various SECURE 2.0 provisions, including confirmations regarding the LTPT two-year rule effective date, the extension to 403(b) plans, and related administrative matters.

Plan sponsors should work with experienced benefits counsel to ensure their plans reflect the most current regulatory guidance. Note that final regulations, if issued subsequent to the date of this Alert, may contain modifications to the proposed regulatory framework. Plan sponsors should also monitor for any additional IRS or Department of Labor guidance addressing LTPT employee issues.

Action Items for Plan Sponsors

Given the SECURE 2.0 changes now in effect, we recommend that plan sponsors take the following steps promptly:

How Can We Help?

Our Employee Benefits & Executive Compensation Practice Group has extensive experience advising plan sponsors on retirement plan design, compliance, and administration. We regularly counsel clients on SECURE Act and SECURE 2.0 implementation matters, including plan amendments, IRS and DOL audit preparedness, and day-to-day administrative questions. If you have questions about how the LTPT rules apply to your plans, please contact Angela Stockbridge at astockbridge@frblaw.com or your primary firm contact.

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.