Nonprofit Resources
SECURE 2.0 Act Alert: Potential Employee Eligibility Issue for 403(b) Plans
The SECURE 2.0 Act includes significant changes to retirement savings policies that aim to improve retirement readiness. These changes affect 401(k), 403(b), and other retirement plans, particularly in the areas of mandatory enrollment, expanded contribution limits, and adjustments to required minimum distributions (RMDs).
While the SECURE 2.0 Act provides many benefits, nonprofit organizations should be aware of a specific provision that could impact certain 403(b) plans, especially those that exclude employees working less than 20 hours a week (1,000 hours annually).
Requirement to Allow Participation
The SECURE 2.0 Act encourages more inclusive eligibility rules, including offering participation to long-term, part-time employees (LTPTs). LTPTs are employees who have worked at least 500 hours a year for two consecutive years. Years of service before January 1, 2023, are disregarded for purposes of determining if an employee meets the definition of a LTPT. If your ERISA-covered Section 403(b) plan currently excludes employees who regularly work less than 20 hours a week, you need to pay special attention to this new LTPT rule.
With the increased focus on inclusion, the IRS could view failure to offer participation as a compliance issue.
Potential Issue
For employers with ERISA-covered Section 403(b) plans that currently exclude employees who regularly work less than 20 hours a week (1,000 hours annually), there’s a risk of noncompliance if excluded employees worked 500 hours or more for two consecutive years prior to January 1, 2025. Those employees should have been given the opportunity to participate in the plan in 2025.
Failure to extend eligibility to these employees may result in penalties or a requirement to offer participation in the retirement plan retroactively.
Action Items
If your organization has an ERISA-covered Section 403(b) plan, we recommend that you take the following steps:
- Review your eligibility requirements – Confirm whether your 403(b) plan currently excludes employees who work less than 20 hours a week. (This is an optional provision, not a requirement.)
- Audit historical participation – If you did not give employees who work less than 20 hours a week the opportunity to participate in your 403(b) plan, evaluate the hours these individuals worked during the previous two years. If they worked more than 500 hours a year for two consecutive years, they should have been given the opportunity to participate as of January 1, 2025 (for calendar year-end plans).
- Consult with legal or plan experts – Work with your legal counsel or retirement plan experts to determine the best course of action if employees should have been offered participation in 2025. This could include offering retroactive participation or adjusting plan procedures to ensure future compliance.
- Notify affected employees – If you determine that certain employees were inadvertently excluded from your 403(b) plan in 2025, you may need to notify them and provide an opportunity for retroactive participation, including any adjustments to contributions or matching funds that were missed.
- Update plan documents and policies – Make any necessary updates to your 403(b) plan documents and policies to ensure compliance with the SECURE 2.0 Act provisions, particularly around eligibility and automatic enrollment. Non-governmental 403(b) plans have until December 31, 2026, to amend the plan document, but the policy must be in place now.
- Prepare for your audit – If your plan is subject to audit, ensure that all documentation is in order so you can demonstrate compliance with SECURE 2.0 Act provisions, particularly those concerning eligibility, employee notifications, and participation opportunities for employees working less than 20 hours a week.
Please contact us with questions or if you would like to discuss how our employee benefit plan auditors can assist your organization.
Emily Toler
Emily serves as Partner and Employee Benefit Plan Services Director at CapinCrouse. She joined the firm in 2009, bringing with her nine years of experience at a Big Four accounting firm. Specializing in audit and other attest services, Emily works with a diverse range of nonprofit clients. Her area of expertise is employee benefit plans, and she serves as the firm’s Employee Benefit Plan Services Director. Emily also is a member of the AICPA Employee Benefit Plans Expert Panel.
4 Comments
Emily,
I’m confused. IRS’ Notice 2024-73 makes it sound like the LTPT provision was postponed until 2026. I have employees who worked more than 500 hours in 2023 and 2024 but haven’t offered them to participate because of the IRS notice.
Please advise.
Doug Guilzon
Focus on the Family
Doug,
LTPT employees must still be given the opportunity to participate in employee deferrals at January 1, 2025, but a plan sponsor is not required to provide matching or nonelective contributions to LTPT employees.
The final regulation related to section 401(k) LTPT employees will apply no earlier than to plan years that begin on or after January 1, 2026, but this does not apply to Section 403(b) plans.
Section IV of Notice 2024-73 states that the notice applies to plan years beginning after December 31, 2024 (which effectively means plan years that began on January 1, 2025, or later). Section V of the notice states that the anticipated final regulation for section 401(k) LTPT employees will apply no earlier than to plan years that begin on or after January 1, 2026. So, as noted, the notice makes it clear that it is addressing two different topics and the January 1, 2026, date only applies to the second topic, final regulations regarding 401(k) LTPT employees.
From IRS NOTICE 2024-73:
Q-2: Is a section 403(b) plan that is subject to ERISA required to provide the right to make elective deferrals to a part-time employee who qualifies as an ERISA LTPT employee?
A-2: Yes. The part-time employee exclusion is a statutory exclusion based on service and applies to employees who normally work less than 20 hours per week. A part-time employee who also qualifies as an ERISA LTPT employee (by meeting the standards under section 202(c) of ERISA) is covered by the eligibility rules for ERISA LTPT employees under section 202(c) of ERISA. Accordingly, unless another statutory exclusion applies, a section 403(b) plan that is subject to ERISA must provide the right to make elective deferrals to a part-time employee who qualifies as an ERISA LTPT employee. In contrast, a part-time employee who does not qualify as an ERISA LTPT employee (for example, because the employee has not worked 2 consecutive years of 500 hours) is not covered by the eligibility rules for ERISA LTPT employees under section 202(c) of ERISA.
I’d be happy to discuss any additional questions you may have.
Could you please opine about non-ERISA-covered church plans. Do the same rules apply? If not, is there ANYTHING we need to do to comply with SECURE 2.0? I also understand that the catch-up provision during 2025 for anyone doing maximum elective deferrals must contribute that catch-up money to a Roth 403(b). Is that correct?
Nancy,
Thank you for your questions. The answer is longer than we can provide in a website comment, but we would be happy to schedule a consultation with you. Please reach out to us at https://capincrouse.com/contact if that is of interest.