Prop Regs for Long-Term Part-Time Employees With 401(k) Plans

The IRS has issued proposed reliance regs that would amend the rules applicable to Code Sec. 401(k) plans to provide guidance with respect to long-term, part-time employees. (Preamble to Prop Reg REG-104194-23)

The proposed regs reflects statutory changes made by the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019, enacted in 2019 as Division O of the Further Consolidated Appropriations Act, 2020 (PL 116-94)) and the SECURE 2.0 Act (specifically sections 125 and 401 of the SECURE 2.0 Act of 2022, enacted in 2022 as Division T of the Consolidated Appropriations Act, 2023 (PL 117-328) that relate to long-term, part-time employees.

Prior to the enactment of the SECURE Act, Code Sec. 401(k)(2)(D) provided that a qualified cash or deferred arrangement (CODA) was not permitted to require, as a condition of participation, that an employee complete a period of service that extended beyond the period permitted under Code Sec. 410(a)(1). In general, the period permitted under Code Sec. 410(a)(1) was the later of attainment of age 21 or completion of a 12-month period during which the employee has at least 1,000 hours of service.

Section 112(a) of the SECURE Act amended Code Sec. 401(k)(2)(D) to provide that a qualified CODA must permit certain employees to participate in the CODA even if they do not have at least 1,000 hours of service in a 12-month period.

Applicability date.

Prop Reg §1.401(k)-5 is proposed to apply to plan years that begin on or after January 1, 2024. (Prop Reg §1.401(k)-5(g)) But, prior to the date final regs are published, taxpayers may rely on the proposed regs. (Preamble to Prop Reg REG-104194-23)

For more information regarding CODA qualifications requirements, see Checkpoint’s Federal Tax Coordinator ¶H-8975.12.