Proposed Regulations on Long-Term Part-Time Employees

INTRODUCTION Proposed regulations regarding long-term, part-time employee (LTPTE) rules were published in the Federal Register on November 27, 2023.1 What follows is a summary of the proposed regulations. EMPLOYEES TO WHICH THE LTPTE RULES APPLY The LTPTE rules apply to an employee who is eligible to make elective deferrals (including those designated as Roth contributions) to a qualified cash or deferred arrangement (Le., a 401(k) plan) solely because the employee completes at least 500 hours of service in each of two consecutive 12-month periods or, with respect to a plan year beginning before 2025, three consecutive 12-month periods; provided that the employee has attained age 21 by the end of the last of those 12-month periods.3 However, a LTPTE does not include collectively bargained employees, nonresident aliens who receive no U.S. source earned income from the employer, and any other employees described in Internal Revenue Code (Code) Section 410(b)(3).4 The regulations illustrate application of the rules described in this paragraph with 12 examples.5 WHO IS NOT AN ŁTPTE If an employee attains age 21 in a 12-month period in which the employee completes fewer than 500 hours of service, the employee does not become a LTPTE at the end of that 12-month period, even if that employee completed two (or three) consecutive 12-month periods prior to that 12-month period.6 The proposed LTPTE regulations also provide that an employee who becomes eligible to participate in elective deferrals under a 401(k) plan by reason of having completed any other permissible service requirement (or is immediately eligible to participate under the terms of the plan) would not be a LTPTE, and the LTPTE rules of Code Section 401(k)(15)(B) would not apply to the employee, even if the employee is classified by the employer or employers maintaining the plan as a part-time employee.7 A former employee, who previously was eligible to participate in a qualified cash or deferred arrangement (but not as a LTPTE) and who is rehired, generally would be immediately eligible to again participate based on the employee's prior service with the employer. [...]former employee would not be eligible to participate as a LTPTE upon rehire, unless the former employee's eligibility service is disregarded under the regular, i.e., Code Section 410(a)(5)(D), break in service rules for nonvested participants.8 Furthermore, an employee who was immediately eligible to participate (or satisfied another per