Breaking Down SECURE Act 2.0: Plan Sponsor Considerations to Avoid a Long-Term Part-Time Mess

By Philip Koehler and Anne Tyler Hall*

Expanding access to retirement plans for the American workforce has been a recurring policy objective of federal pension reform at least as far back as the enactment of the Employee Retirement Income Security Act of 1974, as amended (‘‘ERISA’’). The legislative history of ERISA and its progeny has laid down an historical record of the challenges Congress faced to ensure that this objective stayed up to date with changing workplace realities. Congress has expanded retirement plan coverage principally by:

1. Liberalizing the tax-qualification requirements set forth in the Internal Revenue Code (‘‘Code’’) regarding eligibility, vesting, and requirements for distributions¹ and

2. Ensuring availability of the enforcement mechanisms provided by ERISA².

Looking back, through the prism of the changing realities of the American workplace, it is easy to see that the traditional focus of Congress on expanding coverage for full-time employees unintentionally discriminates against part-time employees.


The Setting Every Community Up for Retirement Enhancement Act of 2019 (‘‘SECURE Act 1.0’’) required 401(k) plans (but not 403(b) plans) to extend limited rights of participation to a group of otherwise ineligible employees classified as ‘‘Long-Term PartTime Employees’’ (LTPT Employees). Under the SECURE Act 1.0, an LTPT Employee is an employee who has satisfied the plan’s minimum age requirement, if any, and performs between 500 and 999 hours of service during each of three consecutive 12-month periods of service beginning on and after January 1, 2021. Upon becoming an LTPT Employee, the individual must have the right under the plan to elect to make salary deferrals.

Under SECURE Act 1.0, the earliest date an LTPT Employee may commence making deferrals under a 401(k) plan is January 1, 2024. Accordingly, many employers face the challenges of modifying their systems and training their staff to track a broader group of potentially eligible employees to ensure that the operation of their plans complies with the LTPT Employee rules. Additionally, employers must confirm that their service providers are making the necessary changes to their systems and staff development.


In December 2022, the Setting Every Community Up for Retirement Enhancement Act of 2022 (‘‘SECURE Act 2.0’’) was enacted. SECURE Act 2.0 makes significant changes to the original LTPT Employee rules under SECURE Act 1.0, as described below.

Reduction of Eligibility Waiting Period From Three Years to Two Years

Effective for plan years beginning after December 31, 2024, employees who have satisfied a plan’s minimum age requirement, if any, and who perform 500 to 999 hours of service during each of two consecutive 12-month periods, must be eligible under the plan to make elective deferrals effective as of the beginning of the next plan year. The changes made by SECURE Act 2.0 to the LTPT Employee rules effectively create a temporary, two-track eligibility system for LTPT Employees for plan years 2024 and 2025:

Three-Year Rule Under SECURE Act 1.0 for the Plan Year Beginning January 1, 2024. A non-excluded employee who satisfied the plan’s minimum age requirement, if any, and is credited with 500–999 hours of service for years 2021, 2022, and 2023 must be eligible to make a deferral election commencing January 1, 2024; and

Two-Year Rule Under SECURE Act 2.0 for Plan Years Beginning January 1, 2025, and Thereafter. A non-excluded employee who satisfied the plan’s minimum age requirement, if any, and was not eligible to make a deferral election commencing January 1, 2024, under the Three-Year Rule, but is credited with 500–999 hours of service for years 2023 and 2024, must be eligible to make a deferral election commencing January 1, 2025. Thereafter, any non-excluded employee who satisfies the plan’s minimum age requirement, if any, and is credited with 500–999 hours of service for two consecutive plan years must be eligible to make a deferral election commencing on the first day of the next following plan year.

Plan Sponsor Action Item

Plan sponsors should consider whether to avoid potentially disparate outcomes and complicated plan amendments by amending the plan to replace the Three-Year Rule with the Two-Year Rule retroactive to 2022, so that the plan uses a uniform eligibility period that makes employees who satisfy the minimum age requirement, if any, and are credited with 500– 999 hours of service for two consecutive plan years, beginning with 2022 and 2023, eligible to make elective deferrals on the first day of the following plan Year, beginning with January 1, 2024. Thereafter, such employees who are credited with 500–999 hours of service in any two consecutive plan years must be eligible to make elective deferrals on the first day of the next following plan year.

Amendment to ERISA to Make an LTPT Employee’s Right to Make Elective Deferrals an Enforceable ERISA Right

Under SECURE Act 1.0, the LTPT Employee rules were only a tax-qualification requirement and could not be enforced by EBSA or an employee through a private federal cause of action under ERISA against the plan administrator. SECURE Act 2.0 amends ERISA to provide an enforceable right of an LTPT Employee to make salary deferrals to the plan through the established enforcement mechanisms available under ERISA §502.³

Plan Sponsor Action Item

For plan years beginning on or after January 1, 2021, the SECURE Act 1.0 requires plan administrators to track employees’ hours of service to determine whether they satisfy the LTPT Employee rules. Changes to the Summary Plan Description, in the form of either a Summary of Material Modifications or a complete restatement that incorporates the new LTPT eligibility and vesting conditions, should be provided to all non-excluded full- and part-time employees. Additionally, the plan sponsor and the plan’s recordkeeper should modify their participant data tracking systems to ensure that enrollment materials and notices of eligibility to participate are sent to LTPT Employees, along with all other eligible employees, within a reasonable period of time before their entry dates.

Extension of the LTPT Employee Rules to ERISA-Covered 403(b) Plans

The SECURE Act 1.0 did not apply the LTPT Employee rules to 403(b) plans that are subject to ERISA. The SECURE Act 2.0 changed this and makes clear that ERISA 403(b) plans, as well as 401(k) plans, must satisfy these requirements.

• Implications to 403(b) Plan ‘‘Universal Availability Rules.’’ Unlike 401(k) plans, 403(b) plans maintained by non-governmental, tax-exempt employers are subject to the ‘‘universal availability’’ requirement of Code §403(b)(12), which generally requires that all employees must be eligible to make deferrals. However, such plans were permitted to exclude employees who normally perform less than 20 hours of service per week and employees who are enrolled students regularly attending classes. The LTPT Employee rules, as modified by SECURE Act 2.0, appear to eliminate these special exclusions. For plan years beginning on or after January 1, 2025, employees and other employees who would have been excludible under Code §403(b)(12) may no longer be excluded if they have completed at least two consecutive 12-month periods during which they were credited with 500–999 hours of service.

Plan Sponsor Action Item

Employers who sponsor 403(b) plans should review all classes of employees excluded under the Universal Availability Rules of Code §403(b)(12) to ensure that they are no longer excluded under these rules beginning January 1, 2025.

Clarification of the Eligibility and Vesting Service Crediting Method and Top-Heavy Rules for 401(k) Plans

If a plan makes LTPT Employees eligible to receive employer contributions, the employer contributions must be subject to the same vesting schedule that applies to other participants. However, the LTPT Employees must be credited with a year of vesting service for each 12-month period in which they perform at least 500 hours of service. Under the language of the SECURE Act 1.0, the IRS argued that all of an LTPT Employee’s service with the employer must be counted for vesting service crediting purposes, including pre-2021 service. However, the SECURE Act 2.0 includes technical corrections that (1) expressly disregard employees’ pre-2021 service for eligibility and vesting service crediting purposes, and (2) excludes LTPT Employees from the vesting and benefit provisions of the Top-Heavy Plan rules and for purposes of determining whether a plan is top-heavy. To eliminate a potential misunderstanding that LTPT Employees are entitled to have any pre-2021 service grandfathered under the IRS interpretation, the SECURE Act 2.0 made these technical corrections effective retroactive to the effective date of the SECURE Act 1.0.

Employer Contributions

Both SECURE Act 1.0 and 2.0 make clear that employers are not required to match LTPT Employee elective deferrals or make non-elective contributions (including safe harbor contributions) that they make for other participants under the plan.

Minimum Coverage Rules Unchanged/ Potentially Allow for Exclusion of LTPT Employees

It is noteworthy that the LTPT Employee rules do not change the minimum coverage requirements of Code §410(b). Thus, LTPT Employees do not have an absolute guarantee of the right to make elective deferrals. Under Code §410(b), employers may limit the employees who benefit under the plan to a special classification of employees, even if it excludes otherwise nonstatutorily excludible employees, e.g., parttime employees. This applies so long as the classification is (1) reasonable and based on objective business criteria and (2) the plan’s ratio percentage is either greater than or equal to the safe harbor percentage, as set forth in the regulations, or equal to or greater than the unsafe harbor percentage and is nondiscriminatory based on a factual determination described in the regulations. For example, an employer may choose to limit coverage to a classification of employees who are salaried only, thereby effectively excluding all of its hourly paid employees. In that scenario, all parttime employees who are hourly paid would be excluded from coverage, notwithstanding the LTPT Employee rules.

Inclusion of LTPT Employees May Increase Retirement Plan Cost

While there appears to be a broad consensus that expanding access to retirement plan coverage is a good thing, it is not without cost. The impact of the LTPT Employee rules is inherently situational and depends upon an employer’s workforce part-time employee concentration. In some cases, merely allowing low-wage employees at high risk of turnover to make deferral elections will have little to no impact. On the other hand, employers in industries like construction, restaurants, and health care, which traditionally have large part-time employee concentrations, face a significantly greater risk that their LTPT Employees will create an unexpected surge in their plans’ participant head count. A plan’s administrative expenses generally rise in proportion to the increase in participant head count, and service providers typically assess larger fees for plans based on increases in the participant head count and/or asset base. On the other hand, employers whose business models depend on workforces with a significant concentration of part-time employees should be able to leverage the expanded 401(k) plan eligibility to LTPT Employees to reduce the cost of turnover and traditional lack of employee engagement within this group.

Simplified Form 5500 Reporting May Be Offset by Expanded Eligibility of LTPT Employees

Many small employers are eligible for the simplified annual Form 5500 reporting requirements available to ‘‘small plans,’’ which are generally plans with fewer than 100 participants. The advantages include an exemption from the requirement to file an annual audit report as an attachment. ‘‘Small plans’’ are allowed the use of the short form 5500-SF. Naturally, there is a tension between plan design changes and other factors that aim to increase a plan’s participant head count and a small employer’s continued eligibility for the ‘‘small plan’’ exception.

Effective for the 2023 Form 5500 series filing requirements, the Department of Labor (DOL), Department of Treasury, and Pension Benefit Guaranty Corporation jointly published a Notice in the Federal Register on February 24, 2023 (the ‘‘Notice’’⁴ ). The Notice included an announcement by the DOL of a change in the participant-counting methodology for determining a defined contribution plan’s eligibility for the ‘‘small plan’’ exemption. Under the participant-counting methodology in effect for returns on or before the 2022 plan year, employees are considered participants in a defined contribution retirement plan when they satisfy the plan’s age and service requirements for participation (i.e., when they are eligible to participate), even if they do not elect to participate in the plan. For plan years beginning in and after 2023, the new methodology counts only the number of participants with account balances as of the beginning of the plan year. According to the Notice, the rule change would prevent about 18,699 defined contribution plans from being considered large and subject to the more expanded large plan filing requirements, including a costly audit report.

Consider the Interplay of Form 5500 Small Plan Relief and Eligibility Expansion to LTPT Employees

The DOL clearly anticipates that the change in participant-counting methodology will have a beneficial effect by reducing a plan’s participant head count beginning with the 2023 Form 5500 series filing. However, the LTPT Employee rules, which go into effect January 1, 2024, will cut the other way. For employers that have historically qualified for the ‘‘small plan’’ exemption and report a participant head count near the threshold based on the 80–120 rule on December 31, 2024, the effect of the LTPT Employee rules may jeopardize their continued qualification for the ‘‘small plan’’ exemption sooner rather than later. No matter how this plays out, the effect of the LTPT Employee rules is likely to change the economics of part-time employment for employers who maintain tax-qualified retirement plans.


Plan sponsors who employ part-time employees should carefully review the LTPT Employee rules in SECURE Act 1.0 and 2.0 and determine potential impacts on their policies, procedures, and processes and those of the plan’s service providers. For large employers with a significant part-time employee concentration, additional administrative fees and more complex tracking of hours of service will likely result in increased compliance costs. Large employers will also need to determine whether to provide for matching and/or non-elective contributions for LTPT Employees who elect to participate in the plan. Employers who qualified for the ‘‘small employer’’ exemption should project the impact of the LTPT Employee rules on their ongoing qualification for this status, which allows them to avoid a costly annual audit report requirement and to use the short form 5500-SF.

To ensure that their 401(k) or 403(b) plans comply with the LTPT Employee rules, as amended by the SECURE Act 2.0, plan sponsors should immediately:

• Establish robust part-time employee hours of service tracking and record-keeping processes;

• Confirm that the plan’s service providers have made appropriate changes as well;

• Modify summary plan descriptions, other materials, and participant communication portals to provide LTPT Employees with advance notice of the effective date on which they may begin to make elective deferrals; and

• Leverage HR policies and procedures to highlight the inclusion of LTPT Employees in retirement plan participation and facilitate increased engagement.

Tax Management Compensation Planning Journal

® 2023 Bloomberg Industry Group, Inc.

ISSN 0747-8607

* As founder and Managing Partner at HBL, Anne Tyler Hall understands first-hand the importance of strategically designed, legally compliant benefit plans aimed at attracting, motivating, and retaining top employees. Equally important is responsive and timely legal compliance guidance to businesses who are in six, seven, and eight-figure Internal Revenue Service, Department of Labor, or Department of Health and Human Services penalty situations. Ms. Hall is a proud graduate of the University of Alabama School of Law, and she earned her Master of Laws in Taxation from the prestigious Georgetown University Law Center. Phil Koehler, a Certified Employee Benefit Specialist (CEBS), is an ERISA specialist, having worked in all areas of employee benefits legal compliance including retirement plans, health and welfare plans, and executive compensation. In addition to his JD from University of Southern California’s Gould School of Law, Mr. Koehler earned his Masters of Business Administration from the University of California, Irvine. This article may be cited as Philip Koehler and Anne Tyler Hall, Breaking Down SECURE Act 2.0: Plan Sponsor Considerations to Avoid a Long-Term Part-Time Mess, 51 Tax Mgmt. Comp. Plan. J. No. 5 (May 5, 2023).

¹ The Tax Reform Act of 1986 amended ERISA to provide more rapid minimum vesting standards effective December 31, 1988. The Small Business Job Protection Act of 1996 requires employers to make additional non-elective employer contributions. The Economic Growth and Tax Relief Act of 2001 increased the amount that individuals and employers could contribute to defined contribution plans. The Pension Protection Act of 2006 made it easier for employers to enroll their employees automatically in 401(k) plans.

² ERISA §502 authorizes plan participants and beneficiaries, the Department of Labor, and other specified parties to bring claims to enforce ERISA’s substantive requirements and seek remedies for violations of benefit plan terms (29 U.S.C. §1132).

³ Id.

⁴ 88 Fed. Reg. 11,984.

The following two tabs change content below.

Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.