On October 3, 2024, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released Notice 2024-73. The focus of the notice is to provide guidance regarding how the long-term, part-time (LTPT) employee rules apply to 403(b) plans beginning for plan years after December 31, 2024. It also provides the earliest applicability date for forthcoming final regulations regarding LTPT employees in 401(k) plans.

Section 125 of the SECURE 2.0 Act of 2022 (SECURE 2.0) expanded the application of the LTPT employee rules to 403(b) plans and amended certain sections of the Internal Revenue Code (IRC) and ERISA to address the participation and vesting rights of LTPT employees in ERISA-covered 403(b) plans (ERISA LTPT employees).

Six key questions answered regarding 403(b) LTPT employees

The notice is in question-and-answer format, with the following key takeaways:

Q&A-1: The eligibility rules that apply to ERISA LTPT employees do not apply to 403(b) plans that are not subject to Title I of ERISA.

Starting with plan years beginning after December 31, 2024, ERISA-covered 403(b) plans must generally allow ERISA LTPT employees to make elective deferrals if they have worked at least 500 hours in each of two consecutive 12-month periods and have attained age 21 by that time. However, this provision does not apply to 403(b) plans that are not subject to ERISA, such as governmental plans.

Note that part-time employees who become eligible to participate in ERISA-covered 403(b) plans solely by reason of satisfying the special ERISA LTPT employee eligibility requirements need only be eligible to make elective deferrals and need not receive any employer nonelective or matching contributions they have not become eligible to participate in for other reasons. See Q&A-6 below for the rules that apply if an ERISA LTPT employee later becomes eligible to participate for other reasons.

Q&A-2: ERISA-covered 403(b) plans must give part-time employees who qualify as ERISA LTPT employees the right to make elective deferrals unless another statutory exclusion applies.

Examples of other statutory exclusions, i.e., categories of employees that a 403(b) plan may exclude from making elective deferrals, are employees who are eligible to make elective deferrals under another plan of their employer, nonresident aliens, and student employees. See Q&A-4 below for more information on the student employee exclusion.

Q&A-3: ERISA-covered 403(b) plans may continue to exclude part-time employees who normally work less than 20 hours per week and who do not qualify as ERISA LTPT employees without violating the 403(b)-consistency requirement, which prevents a 403(b) plan “from selectively applying the part-time employee exclusion to some, but not all, part-time employees.”

Q&A-4: ERISA-covered 403(b) plans do not have to provide student employees who qualify as ERISA LTPT employees the right to make elective deferrals.

The student employee exclusion is allowed by the statute and is principally based on the employee’s classification rather than on service.

Q&A-5: ERISA-covered 403(b) plans may exclude ERISA LTPT employees from the Code Section 401(m) nondiscrimination testing—the actual contribution percentage (ACP) test—that applies to employer matching contributions.

These employees may be excluded from the ACP test, as well as from receiving safe harbor employer matching contributions under an ACP safe harbor 403(b) plan.

Q&A-6: If an ERISA LTPT employee in an ERISA-covered 403(b) plan later becomes eligible to participate for reasons other than the eligibility rules for ERISA LTPT employees (for example, because they worked 1,000 hours in the preceding year), then they cannot any longer be excluded from receiving any employer nonelective or matching contributions and cannot be excluded from nondiscrimination and coverage testing that applies to such employer contributions.

Additional guidance forthcoming

In addition to requesting comments on this notice, Treasury and IRS made the following announcements:

• The not yet released final regulations related to 401(k) LTPT employees will not apply earlier than plan years beginning on or after January 1, 2026. Pending release of the final regulations, plan sponsors may rely on the guidance in the proposed regulations related to 401(k) LTPT employees that were released and published in the Federal Register on November 27, 2023.
• Treasury and IRS plan to issue proposed regulations specific to 403(b) plans that will provide further guidance on LTPT employee eligibility and vesting rules for ERISA-covered 403(b) plans, which are expected to be similar to the LTPT employee rules for 401(k) plans.

Please contact your Milliman consultant with any questions.