New retirement eligibility guidance for part-time employees

The IRS has provided guidance (Notice 2024-73) on a number of discrete issues regarding the new eligibility rules for long-term, part-time employees under certain Section 403(b) retirement plans, including the application of the nondiscrimination rules under Section 403(b)(12).

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the SECURE 2.0 Act of 2022 provided a new eligibility rule for Section 401(k) and 403(b) plans, requiring employers to allow employees who complete at least 500 hours of service during each of three consecutive 12-month periods to make elective deferrals under the plan. However, plan sponsors are not required to provide matching contributions or other employer contributions to these long-term, part-time employees. Under previous rules, Section 401(k) and 403(b) plans generally were not required to allow employees to enter the plan and make elective deferrals until they completed 1,000 hours of service in a 12-month period, though plan sponsors could always allow employees to enter a plan on more favorable terms, such as immediately upon retirement.

Notice 2024-73 confirms, among other items of guidance, that the new eligibility rules for long-term, part-time employees only apply to Section 403(b) plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA). As a result, Section 403(b) plans that are exempted from ERISA, such as governmental and church Section 403(b) plans, are not subject to the new eligibility rules.

The new eligibility rules for both Section 401(k) and 403(b) plans are generally effective for the first plan year beginning in 2024. The guidance provided in the notice applies for plan years beginning after Dec. 31, 2024.

Notice 2024-73 follows the publication of proposed regulations addressing the new mandatory eligibility rules for Section 401(k) plans. The notice also provides that the anticipated final regulations for Section 401(k) plans will apply no earlier than to plan years that begin on or after Jan. 1, 2026 (extending the original proposed applicability date of plan years beginning on or after Jan. 1, 2024).

The IRS also indicated that it anticipates issuing proposed regulations with respect to the new eligibility rules for 403(b) plans. The anticipated guidance is expected to be similar to final regulations with respect to Section 401(k) long-term, part-time employees. 

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