The SECURE Act (“SECURE 1.0”) included a provision that required sponsors of 401(k) plans to include their long-term, part-time, or LTPT, employees in their plans for purposes of deferring part of their compensation into the plan. Plan sponsors are not required to contribute for those LTPT participants (e.g., matching contributions) even if they do for “regular” participating employees,  but they may.

For purposes of SECURE 1.0, a part-time, or PT, employee is an employee who works at least 500 hours a year, but not enough to satisfy the plan’s regular eligibility provisions. A long-term employee is a PT employee who satisfies the requirement for three consecutive years. The first contingent of qualifying LTPT employees must have been allowed to defer in January of 2024. (For purposes of this article, I’m assuming that plans are on a calendar year.)

To accomplish this result, SECURE 1.0 amended Internal Revenue Code section 401(k)(2)(D). The failure to satisfy the conditions of that section will result in the loss of tax qualification for a plan…a disastrous result if not corrected. (The IRS and SECURE 2.0 correction procedures will be discussed in another article. But the “disastrous” scenario can usually be avoided if the plan sponsor is attentive.)

I am concerned about how “quiet” this subject has been. Granted, there have been articles and newsletters, but very little discussion of whether plan sponsors are fully aware and complying. Maybe the quietness means that there isn’t a problem, but maybe it means that there is. As a compliance oriented lawyer, it’s my nature to assume the worst.

Then along came SECURE 2.0–which compounds the issue and perhaps the problems.

First, SECURE 2.0 reduce the long-term part of LTPT to two years, with the measuring period beginning in 2023, meaning that if a qualifying PT employee satisfied the hours requirement in 2023 and 2024, the PT employe would be eligible to begin deferring in January of 2025, just a few weeks from now.

My “best guess” is that larger employers are aware of and complying with these new rules. But I am concerned that smaller plan sponsors may not be.

Second, SECURE 2.0 amended both the Code and ERISA to apply the new two-year LTPT requirement to private sector (that is, ERISA) 403(b) plans. For example, that would include private schools and colleges.

As with 401(k) plan sponsors, my concern is that smaller private sector 403(b) sponsors may not be aware of the requirements and, as a result, may inadvertently be failing to satisfy them, thereby jeopardizing their plans.

To further compound matters, SECURE 2.0 included a provision that requires that 401(k) and private sector 403(b) plans established on or after December 29, 2022, begin automatically enrolling their eligible employees no later than 2025. (There are exceptions for vary small employers and new employers.) For calendar year plans, that would apply  to the first payroll in January 2025. That provision does not include an exclusion for LTPT employees, so ERISA attorneys are advising their affected plan sponsor clients that they should automatically enroll their eligible LTPT employees.

Concluding Thoughts

So, what can be done to avoid these problems.

First, advisors and providers should redouble their efforts to inform affected employers of the new rules and requirements, and the steps necessary to comply.

Second, if there are compliance failures, they should be corrected as soon as possible under the IRS’ compliance program—EPCRS. My next article will be about correcting LTPT failures.

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The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.