This guidance also announced that any final rule addressing the LTPT employee rules for 401(k) plans, which was the subject of a proposed rule published on November 27, 2023 that we discussed in an insight, will apply no earlier than for plan years that begin on or after January 1, 2026.

Background

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE) required sponsors of 401(k) plans to allow LTPT employees to make elective contributions. The SECURE provision did not address 403(b) plans covered by ERISA. SECURE 2.0 further amended ERISA and the Internal Revenue Code to require that those plans offer LTPT employees the right to make elective contributions.

An LTPT employee is, after the SECURE 2.0 amendments, an employee who works at least 500 hours for each of two-consecutive years. Employees who participate solely because they are LTPT employees do not have to receive matching or other employer contributions even if such contributions are made for non-LTPT employees. The SECURE statutory provisions were effective for plan years beginning on and after January 1, 2024. The SECURE 2.0 statutory provisions are effective for plan years beginning on and after January 1, 2025.

The latest guidance

The latest guidance, Notice 2024-73, addresses certain special rules for how 403(b) plans covered by ERISA interact with the LTPT employee requirements. The 2023 IRS proposed regulations for LTPT employees in 401(k) plans did not address these issues.

In general, under the universal availability rule, 403(b) plans must allow all employees to make elective contributions with certain exceptions. Two major exceptions are for students performing certain services and employees who normally work less than 20-hours per week.

Notice 2024-73 explains how 20-hour employees and student employees are treated with respect to the LTPT employee rules:

• A 20-hour employee must be included as a LTPT employee if they meet the LTPT employee definition (500 hours in each of two consecutive years). This is because the 20-hour exception is a “service” rule that the LTPT employee requirement overrules.
• The student rule, on the other hand, is a statutory exception, and thus is not overruled by the LTPT employee inclusion rule. Accordingly, the ERISA-covered 403(b) plan can exclude an employee who meets the student exception, even if such employee would otherwise be an LTPT employee.

As noted above, the guidance applies for plan years beginning after December 31, 2024.

What's next?

In Notice 2024-73, the IRS requests comments by December 20, 2024. In addition to comments on the subjects addressed in Notice 2024-73, the IRS asks for comments on any other issues that should apply differently to employees under 401(k) plans and employees under ERISA-covered 403(b) plans.

The IRS anticipates issuing proposed LTPT employee regulations for 403(b) plans covered by ERISA that, except for specific unique issues, will be similar to the final regulations it will be issuing for LTPT employees in 401(k) plans.