On October 3, 2024, the IRS issued guidance on applying the Long-Term, Part-Time Employee (LTPT) rules to 403(b) plans beginning in 2025, as enacted in the legislation known as SECURE 2.0 in IRS Notice 2024-73 (Notice). The LTPT rules were first enacted to apply to 401(k) plans in the legislation known as the SECURE Act. LTPTs are part time employees who work more than 500 hours of service for a consecutive period. Originally for 401(k) plans that was three years for plan years beginning after December 31, 2020, but SECURE 2.0 changed it to two consecutive years beginning for plan years after December 31, 2024. SECURE 2.0 also extended the LTPT rules to 403(b) plans. LTPTs must be eligible to make elective deferrals to the plan but do not have to be eligible for matching or nonelective employer contributions. LTPTs also do not need to be included in discrimination tests for matching contributions. The Notice addresses how the LTPT rules coordinate with other exclusions from 403(b) plans.

Non-ERISA 403(b) Plans. First, the Notice confirms that the LTPT rules do not apply to non-ERISA 403(b) plans. For example, a governmental 403(b) plan is not subject to the LTPT rules because it is not a plan subject to ERISA. This eliminates plans of public schools.

Part-Time Employee Exclusion. While 403(b) plans are subject to the Universal Availability rule that basically says all employees of the employer sponsoring the plan must be eligible to make elective deferrals to the plan if any employee is eligible to make such deferrals, there is an important exception for part-time employees. Generally a 403(b) plan can exclude employees who normally work less than 20 hours per week. The Notice confirms that a 403(b) plan may continue to have the 20 hours per week exclusion. However, if an employee who normally works less than 20 hours per week nonetheless works 500 hours in two consecutive years, the employee becomes eligible to make elective deferrals. Additionally, if after becoming eligible as an LTPT, the employee meets the plan’s general eligibility requirements (e.g., 1,000 hours of service), the employee cannot be excluded from employer contributions.

Student Employee Exception. Another exclusion allowed under a 403(b) plan is students who are performing services at the school, college, or university at which they are enrolled and regularly attending classes. The Notice confirms that because this exclusion is not dependent upon service, such student employees are not affected by the LTPT rules. That is, they will not become eligible if they render 500 hours of services as a student employee for two consecutive years.

Effective Date. The Notice is effective for plan years beginning after December 31, 2024. Additionally, the Notice provides that the Treasury Department and IRS anticipate issuing proposed regulations for LTPTs in 403(b) plans that will be similar to the not yet finalized final regulations relating to LTPTs for 401(k) plans. The Notice also provides that the final 401(k) plan LTPT regulations will not be effective until plan years beginning after January 1, 2026. However, the law is still effective. Comments are requested by December 20, 2024.

Conclusion. Although plan amendments for LTPT rules are not required until the end of the 2026 plan year, 403(b) plan operations must be compliant by January 1, 2025. It should also be noted that employers can amend their plan by January 1, 2025, to provide that all part-time employees are immediately eligible for deferrals, and avoid having to administer the LTPT rules.