In November 2023, the IRS issued proposed regulations addressing the SECURE 2.0 long-term part-time (LTPT) employee eligibility requirements applicable to 401(k) plans knowing that further guidance would be needed to explain how those requirements would apply to 403(b) plans—you can read our summary of the proposed regulations
here. The publication of
IRS Notice 2024-73 last week represents a significant step forward in delivering that guidance. All 403(b) plan sponsors will likely appreciate Notice 2024-73, but colleges, universities, and teaching hospitals may find it especially helpful. While Notice 2024-73 addresses several issues pertinent to 403(b) plans, this post will focus only on the treatment of part-time employees and student employees.
Background
Section 403(b) plans are subject to many of the same nondiscrimination rules that apply to 401(k) plans, but some special rules and exceptions also apply. Most notably, Code Section 403(b)(12)(A) requires 403(b) plans to satisfy a “universal availability” requirement. Under the universal availability requirement, all employees of an employer sponsoring a 403(b) plan must be allowed to make elective deferrals if any employee of the employer is allowed to make elective deferrals. However, as most 403(b) plan sponsors know, there are two significant exceptions to the universal availability requirement. Specifically, a 403(b) plan may exclude student employees and employees who normally work less than 20 hours per week without violating the universal availability requirement. In the days following the enactment of SECURE 2.0, which expanded the application of the LTPT employee eligibility requirements to 403(b) plans, many practitioners wondered whether or how those exceptions could survive. Notice 2024-73 confirms that student employees and certain part-time employees can still be excluded from a 403(b) plan.
Excluding Part-Time Employees and Student Employees under Notice 2024-73
After explaining that the LTPT employee eligibility requirements do not apply to non-ERISA 403(b) plans but do apply to ERISA 403(b) plans, the Notice confirms that a 403(b) plan may: (1) exclude part-time employees who do not qualify as LTPT employees without violating the “consistency requirement” under the Section 403(b) nondiscrimination rules (explained below); and (2) exclude student employees even if they would otherwise qualify as LTPT employees.
Although the long-standing exclusion for employees who normally work less than 20 hours per week is no longer viable in light of the LTPT employee eligibility requirement, part-time employees who are unable to achieve LTPT employee status (i.e., those part-time employees who are not credited with at least 500 hours of service in each of two consecutive 12-month periods beginning on or after January 1, 2023) can still be excluded from a 403(b) plan. Before the issuance of Notice 2024-73, 403(b) plan sponsors and practitioners were concerned that any distinction between different categories of part-time employees would run afoul of the “consistency requirement” of Treasury Regulations Section 1.403(b)-5(b)(4)(i). Under the consistency requirement, if a 403(b) plan permissibly excludes a given class of employees, it must do so uniformly. Therefore, if a 403(b) plan permissibly excludes part-time employees, it cannot allow some part-time employees to participate while excluding other part-time employees. Notice 2024-73 confirms that a 403(b) plan may exclude part-time employees who do not qualify as LTPT employees, and it notes that the consistency requirement under the regulation will be updated accordingly. See Q&A 3 of the Notice.
Regarding student employees, the Notice explains that this statutory exclusion under Code Section 403(b)(12)(A) continues to be valid because it is based on a classification of employees – students performing services described in Code Section 3121(b)(10) – rather than on service or work schedules. Therefore, the Notice confirms that student employees may be excluded from a 403(b) plan regardless of whether the student employee may qualify as an LTPT employee. See Q&A-4 of the Notice. This will come as welcome news for colleges, universities, teaching hospitals, and other educational organizations that have historically excluded student employees from their 403(b) plans.
Effective Dates
Notice 2024-73 applies for plan years beginning after December 31, 2024, just in time to help 403(b) plan sponsors identify the first group of LTPT employees who may be eligible to make elect deferrals under their plans. The Notice also states that final regulations governing the application of the LTPT employee eligibility requirement to 401(k) plans will apply no earlier than plan years beginning on or after January 1, 2026.
