Unlocking Retirement Access: What Employers Must Do to Prepare for New 403(b) Rules for Long-Term, Part-Time Workers
The Treasury Department and the IRS recently issued guidance affecting long-term, part-time (LTPT) employees participating in 403(b) retirement plans, with key provisions coming into effect in 2025. This is part of the broader SECURE 2.0 Act, which aims to expand retirement savings opportunities for workers, especially those in nonprofit sectors like public schools and charities. As an employer, understanding these changes is crucial for ensuring compliance and properly managing your workforce’s retirement benefits.
What Are 403(b) Plans?
403(b) plans, similar to 401(k)s, are tax-sheltered retirement plans designed for employees of tax-exempt organizations, public schools, and certain ministers. While both 403(b) and 401(k) plans aim to promote retirement savings, the new guidance focuses on long-term, part-time workers and adjusts certain nondiscrimination rules in these plans.
What Does the Guidance Address?
The Treasury and IRS have provided a comprehensive Q&A document, Notice 2024-73, that clarifies how nondiscrimination rules apply to part-time and long-term part-time employees in 403(b) plans. These rules touch on:
I.?Eligibility: ?LTPT employees who meet certain service hour thresholds (500 hours over 2 consecutive years) must be allowed to participate in 403(b) plans. This extends the reach of retirement benefits to a previously underserved group of workers.
II. Exclusions: ?Employers can continue to exclude student workers and part-time employees who don’t meet the LTPT criteria from participating in 403(b) plans. However, the guidance insists on consistency in applying these exclusions to avoid selective inclusion.
Key Action Items for Employers
To ensure compliance with the new rules, employers managing 403(b) plans should consider the following steps:
I.?Review Current Plan Terms: ?Assess your current 403(b) retirement plan to ensure it aligns with the SECURE 2.0 provisions regarding LTPT employees. If your plan excludes part-time employees, verify that those exclusions will not apply to LTPT employees meeting the new eligibility criteria starting in 2025.
II.?Plan Documentation: Update plan documents to incorporate these changes. It’s critical to outline how part-time employees will be tracked and how you’ll determine which ones meet the 500-hour requirement over consecutive years.
III.?System Adjustments: Employers must ensure that payroll systems and plan administration tools are equipped to accurately track employee hours and apply the appropriate eligibility rules for LTPT employees.
IV. Vesting Rules: For employers with 403(b) plans subject to ERISA, note the special vesting rules for LTPT employees. Each 12-month period during which an LTPT employee works at least 500 hours must count towards vesting, ensuring they accumulate retirement savings over time.
Delayed Implementation for 401(k) Plans
While the guidance for 403(b) plans becomes effective in 2025, the corresponding rules for 401(k) plans won’t apply until 2026. Employers who manage both types of plans should prepare now for the upcoming changes, even if the timeline for 401(k) adjustments is further out.
Next Steps for Employers
The Treasury and IRS are still finalizing regulations and seeking public comments. Employers should monitor upcoming regulations closely to stay informed about additional details or potential changes. In the meantime, start working with legal and compliance teams to adjust your 403(b) plans before the 2025 deadline.
Conclusion
The latest IRS and Treasury guidance marks an important step in improving retirement access for long-term, part-time workers under 403(b) plans. Employers must act proactively to review, update, and administer their retirement plans in accordance with these new rules. Staying ahead of the changes not only ensures compliance but also enhances your organization’s ability to support all employees in building a secure financial future.
By taking these steps now, employers will be well-prepared for the transition, benefitting both their organization and their long-term, part-time employees.
Source: IR-2024-257, Oct. 3, 2024