[Federal Register Volume 88, Number 226 (Monday, November 27, 2023)]
[Proposed Rules]
[Pages 82796-82817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25987]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-104194-23]
RIN 1545-BQ70


Long-Term, Part-Time Employee Rules for Cash or Deferred 
Arrangements Under Section 401(k)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document sets forth a proposed regulation that would 
amend the rules applicable to plans that include cash or deferred 
arrangements under section 401(k) to provide guidance with respect to 
long-term, part-time employees. The proposed regulation reflects 
statutory changes made by the SECURE Act and the SECURE 2.0 Act that 
relate to long-term, part-time employees. The proposed regulation would 
affect participants in, beneficiaries of, employers maintaining, and 
administrators of plans that include cash or deferred arrangements. 
This document also provides notice of a public hearing.

DATES: Written or electronic comments must be received by January 26, 
2024. A public hearing on this proposed regulation has been scheduled 
for March 15, 2024, at 10 a.m. ET. Requests to speak and outlines of 
topics to be discussed at the public hearing must be received by 
January 26, 2024. If no outlines are received by January 26, 2024, the 
public hearing will be cancelled. Requests to attend the public hearing 
must be received by 5 p.m. ET on March 13, 2024. The public hearing 
will be made accessible to people with disabilities. Requests for 
special assistance during the public hearing must be received by March 
12, 2024.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-104194-
23) by following the online instructions for submitting comments. 
Requests to speak at or attend the public hearing must be submitted as 
prescribed in the ``Comments and Public Hearing'' section. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comment submitted 
electronically or on paper to its public docket on www.regulations.gov. 
Send paper submissions to: CC:PA:01:PR (REG-104194-23), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the regulation, call Kara 
M. Soderstrom at (202) 317-6799 or Jason E. Levine at (202) 317-4148; 
concerning submission of comments, the hearing, and the access code to 
attend the hearing by telephone, call Vivian Hayes at (202) 317-6901 
(not toll-free numbers) or email [email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Background

    This document sets forth proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 401 of the Internal Revenue 
Code (Code). This proposed regulation would amend Sec.  1.401(k)-5 to 
set forth rules and definitions applicable to long-term, part-time 
employees under section 112 of the Setting Every Community Up for 
Retirement Enhancement Act of 2019 (SECURE Act), enacted on December 
20, 2019, as Division O of the Further Consolidated Appropriations Act, 
2020 (Pub. L. 116-94, 133 Stat. 2534 (2019)), and sections 125 and 401 
of the SECURE 2.0 Act of 2022 (SECURE

[[Page 82797]]

2.0 Act), enacted on December 29, 2022, as Division T of the 
Consolidated Appropriations Act, 2023 (Pub. L. 117-328, 136 Stat. 4459 
(2022)).

I. Statutory and Regulatory Framework

    Section 401(k)(1) of the Code provides that a profit-sharing, stock 
bonus, pre-ERISA money purchase, or rural cooperative plan will not 
fail to qualify under section 401(a) merely because it includes a cash 
or deferred arrangement (CODA) that is a qualified CODA. Under section 
401(k)(2), a CODA (generally, an arrangement providing for an election 
by an employee between contributions to a plan or payments directly in 
cash) is a qualified CODA only if it satisfies certain requirements. 
Section 401(k)(2)(B) provides that contributions made pursuant to a 
qualified CODA (referred to as elective contributions) may not be 
distributed before the occurrence of certain events, and section 
401(k)(2)(C) provides that amounts attributable to the elective 
contributions must be nonforfeitable at all times. Section 401(k)(2)(D) 
limits the period of service that a plan may require an employee to 
complete with the employer or employers maintaining the plan in order 
to be eligible to participate in the qualified CODA.
    Pursuant to section 401(k)(3)(A), a CODA is not treated as a 
qualified CODA unless: (1) the group of eligible employees under the 
CODA satisfies the requirements of section 410(b)(1), and (2) elective 
contributions under the CODA satisfy the actual deferral percentage 
(ADP) test in section 401(k)(3)(A)(ii). Under section 401(k)(3)(C), the 
elective contributions (including elective contributions that are 
designated Roth contributions) under a qualified CODA satisfy the 
requirements of section 401(a)(4) for a plan year with respect to the 
amount of those contributions if the contributions satisfy the ADP test 
for the plan year. As an alternative to satisfying the annual ADP test, 
a plan may satisfy the provisions of section 401(k)(11) (a SIMPLE 
401(k) plan), the ADP safe harbor provisions of section 401(k)(12) (a 
traditional safe harbor section 401(k) plan), section 401(k)(13) (a 
qualified automatic contribution arrangement (QACA) safe harbor section 
401(k) plan), or section 401(k)(16) (a starter 401(k) deferral-only 
arrangement).
    Under section 401(m)(1), the matching contributions and employee 
contributions under a defined contribution plan satisfy the 
requirements of section 401(a)(4) for a plan year with respect to the 
amount of those contributions only if the actual contribution 
percentage (ACP) test in section 401(m)(2) is satisfied for the plan 
year. With respect to matching contributions, as an alternative to 
satisfying the annual ACP test, a plan may satisfy the provisions of 
section 401(m)(10) (which parallel the SIMPLE 401(k) provisions of 
section 401(k)(11)), or the ACP safe harbor provisions of section 
401(m)(11) (a traditional safe harbor section 401(m) plan) or section 
401(m)(12) (a QACA safe harbor section 401(m) plan).
    The Treasury Department and the IRS issued comprehensive 
regulations under section 401(k) and (m) on December 29, 2004 (TD 9169, 
69 FR 78143). Since they were issued, the regulations have been updated 
a number of times. For example, the regulations were amended to reflect 
certain statutory changes (see TD 9237, 71 FR 6, and TD 9324, 72 FR 
21103, providing guidance with respect to designated Roth contributions 
under section 402A; and TD 9447, 74 FR 8200, providing guidance with 
respect to section 401(k)(13)) and to address discrete issues unrelated 
to statutory changes (see TD 9319, 72 FR 16878, relating to the 
definition of compensation; TD 9641, 78 FR 68735, relating to mid-year 
amendments to safe harbor plan designs; and TD 9835, 83 FR 34469, 
relating to whether qualified nonelective contributions and qualified 
matching contributions must be nonforfeitable when contributed to the 
plan).
    The regulations were most recently amended on September 23, 2019 
(TD 9875, 84 FR 49651) to reflect statutory changes related to the 
restriction on distribution of elective contributions under section 
401(k)(2)(B).

II. SECURE Act Changes to Section 401(k) Regarding Long-Term, Part-Time 
Employees

    Prior to the enactment of the SECURE Act, section 401(k)(2)(D) 
provided that a qualified 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 section 
410(a)(1) (disregarding section 410(a)(1)(B)(i) \1\). In general, the 
period permitted under section 410(a)(1) is 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.
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    \1\ Section 410(a)(1)(B)(i) provides that a plan may require 
employees to complete 2 years of service (rather than 1) if accrued 
benefits under the plan are 100 percent nonforfeitable after not 
more than 2 years of service.
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    Section 112(a) of the SECURE Act amended section 401(k)(2)(D) of 
the Code 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. Under section 401(k)(2)(D) (as 
added by section 112(a)(1) of the SECURE Act, but prior to amendment by 
the SECURE 2.0 Act), a qualified CODA may not require, as a condition 
of participation, that an employee complete a period of service that 
extends beyond the close of the earlier of: (1) the period permitted 
under section 410(a)(1) (disregarding section 410(a)(1)(B)(i)); or (2) 
subject to section 401(k)(15), the first period of three consecutive 
12-month periods during each of which the employee is credited with at 
least 500 hours of service.
    Section 112(a)(2) of the SECURE Act also amended the Code to add 
section 401(k)(15), which sets forth additional provisions related to 
section 401(k)(2)(D)(ii). Section 401(k)(15)(A) provides that section 
401(k)(2)(D)(ii) will not apply to an employee unless the employee has 
attained the age specified in section 410(a)(1)(A)(i) by the close of 
the last of the 12-month periods described in section 401(k)(2)(D)(ii). 
Section 401(k)(15)(B) (as added by section 112(a)(2) of the SECURE Act, 
but prior to amendment by the SECURE 2.0 Act), modified certain 
nondiscrimination, minimum coverage, top-heavy, and vesting 
requirements with respect to employees who become eligible to 
participate in a qualified CODA solely by reason of section 
401(k)(2)(D)(ii).
    Section 401(k)(15)(B)(i)(I) (as added by section 112(a)(2) of the 
SECURE Act, but prior to amendment by the SECURE 2.0 Act) provided 
that, notwithstanding section 401(a)(4), an employer is not required to 
make nonelective or matching contributions on behalf of employees who 
are eligible to participate in a qualified CODA solely by reason of 
section 401(k)(2)(D)(ii), even if those contributions are made on 
behalf of other employees eligible to participate in the arrangement. 
Under section 401(k)(15)(B)(i)(II) (as added by section 112(a)(2) of 
the SECURE Act, but prior to amendment by the SECURE 2.0 Act), an 
employer may elect to exclude employees who are eligible to participate 
in a qualified CODA solely by reason of section 401(k)(2)(D)(ii) from 
the application of sections 401(a)(4), 401(k)(3), 401(k)(12), 
401(k)(13), 401(m)(2), and 410(b).
    Section 401(k)(15)(B)(ii) provides that an employer may elect to 
exclude all employees who are eligible to participate in a plan 
maintained by the employer solely by reason of section 401(k)(2)(D)(ii) 
from the application of the top-heavy vesting and benefit

[[Page 82798]]

requirements under section 416(b) and (c).
    Under section 401(k)(15)(B)(iii) (as added by section 112(a) of the 
SECURE Act, but prior to amendment by the SECURE 2.0 Act), an employee 
described in section 401(k)(15)(B)(i) must be credited with a year of 
service for purposes of determining whether the employee has a 
nonforfeitable right to employer contributions (other than elective 
contributions) under the arrangement for each 12-month period during 
which the employee is credited with at least 500 hours of service. In 
addition, section 401(k)(15)(B)(iii) modifies the break-in-service 
rules of section 411(a)(6) for the employee by substituting ``at least 
500 hours of service'' for ``more than 500 hours of service'' for 
purposes of applying section 411(a)(6)(A).
    Under section 401(k)(15)(B)(iv) (as added by section 112(a) of the 
SECURE Act, but prior to amendment by the SECURE 2.0 Act), if an 
employee who is eligible to participate in a qualified CODA solely by 
reason of section 401(k)(2)(D)(ii) of the Code subsequently satisfies 
the requirements of section 410(a)(1)(A)(ii) without regard to section 
401(k)(2)(D)(ii), then the special provisions of section 
401(k)(15)(B)(i) and (ii) cease to apply to the employee as of the 
first plan year beginning after the plan year in which the employee 
satisfies the requirements of section 410(a)(1)(A)(ii) without regard 
to section 401(k)(2)(D)(ii). However, the cessation does not apply to 
the special vesting rules of section 401(k)(15)(B)(iii).
    Section 401(k)(15)(C) provides that section 401(k)(2)(D)(ii) does 
not apply to employees described in section 410(b)(3). This includes, 
among others, employees covered by a collective bargaining agreement 
with respect to which retirement benefits were the subject of good 
faith bargaining and nonresident aliens who have no earned income from 
the employer that constitutes U.S.-source income.
    Section 401(k)(15)(D)(i) provides that the entry date rules of 
section 410(a)(4) apply to an employee who is eligible to participate 
in a qualified CODA solely by reason of section 401(k)(2)(D)(ii). 
Section 401(k)(15)(D)(ii) provides that 12-month periods are determined 
in the same manner as under the last sentence of section 410(a)(3)(A).
    Prior to amendment by the SECURE 2.0 Act, section 112(b) of the 
SECURE Act provided that the amendments made by section 112 apply to 
plan years beginning after December 31, 2020, except that, for purposes 
of section 401(k)(2)(D)(ii) of the Code, 12-month periods beginning 
before January 1, 2021, are not taken into account. The effect of 
disregarding 12-month periods beginning before January 1, 2021, is that 
employees generally will not become eligible to participate in a CODA 
pursuant to section 401(k)(2)(D)(ii) until plan years beginning on or 
after January 1, 2024.
    On September 2, 2020, the Treasury Department and the IRS released 
Notice 2020-68, 2020-38 IRB 567, which includes guidance with respect 
to section 112 of the SECURE Act. Q&A C-1 of Notice 2020-68 explains 
that, although section 112(b) of the SECURE Act excludes 12-month 
periods beginning before January 1, 2021, for purposes of determining 
an employee's eligibility to participate in a qualified CODA under 
section 401(k)(2)(D)(ii) of the Code, section 112(b) of the SECURE Act 
does not exclude 12-month periods beginning before January 1, 2021, for 
purposes of determining an employee's nonforfeitable right to employer 
contributions (other than elective contributions) under section 
401(k)(15)(B)(iii) of the Code. However, as described in section III.A 
of this Background, section 125(d) of the SECURE 2.0 Act expands the 
scope of the disregard of 12-month periods beginning before January 1, 
2021, to include the vesting rules of section 401(k)(15)(B)(iii).
    The Treasury Department and the IRS received three written comments 
in response to Notice 2020-68. All written comments responding to 
Notices 2020-68 are available for public inspection and copying at 
http://www.regulations.gov or upon request. These comments are 
discussed in section I of the Explanation of Provisions portion of this 
preamble.

III. SECURE 2.0 Act Changes to Section 401(k) Regarding Long-Term, 
Part-Time Employees and to Section 112(b) of the SECURE Act

A. Section 125 of the SECURE 2.0 Act
    Section 125 of the SECURE 2.0 Act generally expands upon the rules 
set forth in section 112 of the SECURE Act. Section 125(a)(1) of the 
SECURE 2.0 Act amends the minimum participation standards of section 
202 of the Employee Retirement Income Security Act of 1974 (Pub. L. 93-
406, 88 Stat. 829), as amended (ERISA) to add section 202(c) of ERISA. 
Section 202(c) of ERISA adds rules, which apply to either a qualified 
CODA or a salary reduction agreement described in section 403(b) of the 
Code, that are comparable to the rules of section 401(k)(2)(D)(ii) and 
(k)(15). Section 125(a)(2)(B)(ii) of the SECURE 2.0 Act amends the 
employer election provisions of section 401(k)(15)(B)(i) of the Code to 
refer to employees who are eligible to participate in the arrangement 
solely by reason of section 401(k)(2)(D)(ii) or by reason of section 
401(k)(2)(D)(ii) and section 202(c)(1)(B) of ERISA.
    In addition, section 125(c) of the SECURE 2.0 Act amends the period 
of service under section 401(k)(2)(D)(ii) of the Code by replacing 
``3'' with ``2''. Thus, as amended by section 125(c) of the SECURE 2.0 
Act, section 401(k)(2)(D) of the Code provides that a qualified CODA 
may not require, as a condition of participation, that an employee 
complete a period of service that extends beyond the close of the 
earlier of: (1) the period permitted under section 410(a)(1) 
(disregarding section 410(a)(1)(B)(i)); or (2) subject to section 
401(k)(15), the first period of two consecutive 12-month periods during 
each of which the employee is credited with at least 500 hours of 
service.
    Section 125(d) of the SECURE 2.0 Act amends section 112(b) of the 
SECURE Act by replacing the reference to section 401(k)(2)(D)(ii) of 
the Code with references to both section 401(k)(2)(D)(ii) and 
(k)(15)(B)(iii). Thus, as amended by section 125(d) of the SECURE 2.0 
Act, section 112(b) of the SECURE Act provides that 12-month periods 
beginning before January 1, 2021, are not taken into account for 
purposes of either the eligibility rule described in section 
401(k)(2)(D)(ii) or the vesting rules of section 401(k)(15)(B)(iii).
    Section 125(e) of the SECURE 2.0 Act amends the special rules for 
cash or deferred arrangements using alternative methods of meeting 
nondiscrimination requirements under section 416(g)(4)(H) of the Code 
to provide that the term ``top-heavy plan'' does not include a plan 
solely because that plan does not provide nonelective or matching 
contributions to employees described in section 401(k)(15)(B)(i).
    The amendments made by section 125(a) and (c) of the SECURE 2.0 Act 
apply to plan years beginning after December 31, 2024. The amendments 
made by section 125(d) and (e) of the SECURE 2.0 Act take effect as if 
included in section 112 of the SECURE Act.
B. Section 401 of the SECURE 2.0 Act
    Section 401 of the SECURE 2.0 Act sets forth amendments relating to 
the SECURE Act. Section 401(a)(2) of the SECURE 2.0 Act includes 
technical amendments relating to section 112 of the SECURE Act that 
take effect as if included in section 112 of the SECURE Act.

[[Page 82799]]

    Section 401(a)(2)(A) of the SECURE 2.0 Act amends the employer 
election provisions of section 401(k)(15)(B)(i)(II) of the Code to 
include the ACP safe harbor provisions of section 401(m)(11) and (12). 
Thus, as amended by section 401(a)(2)(A) of the SECURE 2.0 Act, section 
401(k)(15)(B)(i)(II) of the Code permits an employer to elect to 
exclude employees who are eligible to participate in a qualified CODA 
solely by reason of section 401(k)(2)(D)(ii) (or by reason of section 
401(k)(2)(D)(ii) and section 202(c)(1)(B) of ERISA) from the 
application of those ACP safe harbor provisions, in addition to the 
other Code provisions listed in section 401(k)(15)(B)(i)(II).
    Section 401(a)(2)(B) of the SECURE 2.0 Act amends the vesting rules 
of section 401(k)(15)(B)(iii) of the Code by replacing ``under the 
arrangement'' with ``under the plan''. Thus, section 401(a)(2)(B) of 
the SECURE 2.0 Act clarifies that section 401(k)(15)(B)(iii) of the 
Code applies for purposes of determining whether an employee described 
in section 401(k)(15)(B)(i) has a nonforfeitable right to employer 
contributions (other than elective contributions) under the plan that 
includes the arrangement.
    Section 401(a)(2)(C) of the SECURE 2.0 Act amends the special rules 
under section 401(k)(15)(B)(iv) of the Code by replacing ``section 
410(a)(1)(A)(ii)'' with ``paragraph (2)(D)''. Thus, section 
401(a)(2)(C) of the SECURE 2.0 Act clarifies that the special rules of 
section 401(k)(15)(B)(iv) of the Code apply if an employee who is 
eligible to participate in a qualified CODA solely by reason of section 
401(k)(2)(D)(ii) (or by reason of section 401(k)(2)(D)(ii) and section 
202(c)(1)(B) of ERISA) subsequently satisfies the requirements of 
section 401(k)(2)(D) without regard to section 401(k)(2)(D)(ii).
C. Section 501 of the SECURE 2.0 Act
    In general, under section 501(a) and (b) of the SECURE 2.0 Act, for 
a qualified plan that is not an applicable collectively bargained plan 
or a governmental plan within the meaning of section 414(d) of the 
Code, the deadline to adopt a plan amendment that is made pursuant to 
any amendment made by the SECURE 2.0 Act or pursuant to any regulation 
issued by the Secretary or the Secretary of Labor (or a delegate of 
either such Secretary) under the SECURE 2.0 Act is the last day of the 
first plan year beginning on or after January 1, 2025, or such later 
date as the Secretary may prescribe. The plan amendment deadline for an 
applicable collectively bargained plan or a governmental plan, as 
defined in section 414(d), is the last day of the first plan year 
beginning on or after January 1, 2027, or such later date as the 
Secretary may prescribe.
    Section 501(c)(1) of the SECURE 2.0 Act amends section 601(b)(1) of 
the SECURE Act, which provides rules with respect to a plan amendment 
made pursuant to a provision of the SECURE Act or regulations 
thereunder, to align the deadline to adopt such a plan amendment with 
the deadline that applies to a plan amendment that is made pursuant to 
a provision of the SECURE 2.0 Act.
    Whether a plan amendment is made pursuant to section 112 of the 
SECURE Act, related provisions of the SECURE 2.0 Act, or any regulation 
relating to those provisions, does not depend on whether any employees 
could become eligible to participate in the CODA as long-term, part-
time employees (as discussed in section I.B of the Explanation of 
Provisions) under the terms of the amended plan. For example, if a plan 
that is not an applicable collectively bargained plan or a governmental 
plan is maintained on a calendar-year basis and provides that, in order 
to be eligible to make a cash or deferred election under the CODA in 
the plan, an employee is required to complete a 12-month period during 
which the employee is credited with at least 1,000 hours of service, 
but the employer intends to amend the plan to provide that, effective 
January 1, 2024, each employee is eligible to make a cash or deferred 
election as soon as administratively practicable after the employee's 
employment commencement date, then the intended plan amendment would be 
made pursuant to section 112 of the SECURE Act and related provisions 
of the SECURE 2.0 Act. Accordingly, if the plan is operated in 
accordance with the intended plan amendment, then the plan amendment 
would not be required to be adopted before the deadline that applies to 
the plan under section 501 of the SECURE 2.0 Act (that is, December 31, 
2025, or such later date as the Secretary may prescribe).

Explanation of Provisions

I. Section 1.401(k)-5

A. Overview
    This proposed regulation would amend Sec.  1.401(k)-5 (which is 
reserved for mergers and acquisitions under the existing regulations) 
to reflect the rules for long-term, part-time employees under section 
112 of the SECURE Act and sections 125 and 401 of the SECURE 2.0 Act. 
Proposed Sec.  1.401(k)-5 defines ``long-term, part-time employee,'' 
and, with respect to each long-term, part-time employee, requires a 
qualified CODA to satisfy the participation requirements of proposed 
Sec.  1.401(k)-5(c) and requires the plan that includes the CODA to 
satisfy the vesting requirements of proposed Sec.  1.401(k)-5(d). In 
addition, proposed Sec.  1.401(k)-5(e) provides guidance regarding 
nonelective and matching contributions made to the plan on behalf of 
long-term, part-time employees, and proposed Sec.  1.401(k)-5(f) 
provides guidance regarding certain elections that the employer or 
employers maintaining the plan may make with respect to long-term, 
part-time employees.
B. Long-Term, Part-Time Employees
1. Definition
    Section 401(k)(15) provides special rules for ``long-term, part-
time employees,'' but does not define the term. The rules in section 
401(k)(15) apply to employees who are eligible to participate in a 
qualified CODA solely by reason of section 401(k)(2)(D)(ii), or by 
reason of section 401(k)(2)(D)(ii) and section 202(c)(1)(B) of ERISA. 
Under section 112(b) of the SECURE Act, section 401(k)(2)(D)(ii) of the 
Code generally is effective for plan years beginning after December 31, 
2020, but, pursuant to section 125(c) of the SECURE 2.0 Act, section 
401(k)(2)(D)(ii) of the Code is amended to replace ``3'' with ``2'' 
effective for plan years beginning after December 31, 2024. Thus, 
section 401(k)(15) applies to employees who are eligible to participate 
in a qualified CODA solely by reason of completing two consecutive 12-
month periods or, with respect to a plan year beginning before 2025, 
three consecutive 12-month periods (referred to as ``the applicable 
number of consecutive 12-month periods'') during each of which the 
employee is credited with at least 500 hours of service. However, 
section 401(k)(15)(A) provides that section 401(k)(2)(D)(ii) does not 
apply to an employee unless the employee has satisfied the age 
requirement of section 410(a)(1)(A)(i) by the close of the last of the 
12-month periods described in section 401(k)(2)(D)(ii). In addition, 
section 401(k)(15)(C) provides that section 401(k)(2)(D)(ii) does not 
apply to employees described in section 410(b)(3).
    Based on the provisions of section 401(k)(15) described in the 
preceding paragraph, proposed Sec.  1.401(k)-5(b)(1)(i) generally would 
define a ``long-term, part-time employee'' as an employee who is 
eligible to participate

[[Page 82800]]

in a qualified CODA solely by reason of having: (1) completed two 
consecutive 12-month periods (under proposed Sec.  1.401(k)-
5(b)(1)(iii), ``three consecutive 12-month periods'' would be 
substituted for ``two consecutive 12-month periods'' with respect to a 
plan year beginning in 2024) during each of which the employee is 
credited with at least 500 hours of service (as defined in section 
410(a)(3)(C)); and (2) attained the age specified in section 
410(a)(1)(A)(i) by the close of the last of those 12-month periods. 
However, under proposed Sec.  1.401(k)-5(b)(1)(ii), long-term, part-
time employees would not include: (1) certain employees who are covered 
by a collective bargaining agreement, (2) employees who are nonresident 
aliens and who receive no earned income from the employer that 
constitutes income from sources within the United States, or (3) any 
other employees described in section 410(b)(3).
    Although section 401(k)(15)(C) provides that section 
401(k)(2)(D)(ii) does not apply to employees described in section 
410(b)(3), section 401(k)(15) does not provide any exceptions from the 
maximum permissible service requirement of section 401(k)(2)(D)(ii) for 
a qualified CODA in: (1) a governmental plan (as defined in section 
414(d)),\2\ or (2) a church plan (as defined in section 414(e)) with 
respect to which the election provided by section 410(d) has not been 
made. In addition to the general request for comments on this proposed 
regulation, comments are specifically requested with respect to the 
application of section 401(k)(15) to a qualified CODA in such a 
governmental plan or church plan, including the application of proposed 
Sec.  1.401(k)-5(d)(1)(ii) (which would clarify that, for purposes of 
proposed Sec.  1.401(k)-5(d), section 411 will be treated as if it 
applies to the plan, taking into account the modifications provided in 
proposed Sec.  1.401(k)-5(d)(1)(i) and (iii)).
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    \2\ Pursuant to section 401(k)(4)(B)(ii) and Sec.  1.401(k)-
1(e)(4), a CODA included in a plan maintained by a State or local 
government or political subdivision thereof, or any agency or 
instrumentality thereof, does not satisfy the requirements to be a 
qualified CODA if the arrangement is adopted after May 6, 1986. 
However, this adoption deadline for a qualified CODA does not apply 
to a CODA included in a rural cooperative plan or a plan of an 
employer that is an Indian Tribal government (as defined in section 
7701(a)(40)), a subdivision of an Indian Tribal government 
(determined in accordance with section 7871(d)), an agency or 
instrumentality of an Indian Tribal government or subdivision 
thereof, or a corporation chartered under Federal, State or Tribal 
law that is owned in whole or in part by any of those entities.
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2. Eligibility To Participate
    As explained in section I.B.1 of this Explanation of Provisions, an 
employee would be a long-term, part-time employee under the proposed 
regulation only if the employee became eligible to participate in a 
qualified CODA solely by reason of having completed the applicable 
number of consecutive 12-month periods during each of which the 
employee is credited with at least 500 hours of service. The Treasury 
Department and the IRS received comments in response to Notice 2020-68 
requesting clarification that the rules of section 401(k)(15) do not 
apply to an employee who becomes eligible to participate in a qualified 
CODA prior to completing the applicable number of consecutive 12-month 
periods during each of which the employee is credited with at least 500 
hours of service (for example, an employee who, upon hire, is 
immediately eligible to make a cash or deferred election under the 
arrangement).
    Under this proposed regulation, an employee would not be a long-
term, part-time employee unless the employee becomes eligible to 
participate in a qualified CODA solely by reason of having completed 
the applicable number of consecutive 12-month periods during each of 
which the employee is credited with at least 500 hours of service (as 
defined in section 410(a)(3)(C)). Thus, an employee who becomes 
eligible to participate in a qualified CODA by reason of having 
completed any other service requirement (or who is immediately eligible 
to participate in the CODA) would not be a long-term, part-time 
employee, and the rules of 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.
    The Treasury Department and the IRS received a comment in response 
to Notice 2020-68 requesting clarification regarding the application of 
the rules of section 401(k)(15) to employees who were immediately 
eligible to participate in a qualified CODA if the plan is later 
amended to require employees to complete the period of service 
described in section 401(k)(2)(D) in order to participate in the CODA. 
Under this proposed regulation, an employee who was immediately 
eligible to participate in a qualified CODA or who became eligible to 
participate based on completing another permissible service requirement 
(for example, completing a 1-year period of service under section 
410(a)(1)(A)(ii)) would not become a long-term, part-time employee 
merely because the plan is amended prospectively to require employees 
hired on or after the effective date of the amendment to complete the 
period of service described in section 401(k)(2)(D). This is because 
the employee was not eligible to participate in the CODA solely by 
reason of completing the applicable number of consecutive 12-month 
periods with at least 500 hours of service during each period.
3. Elapsed Time Method of Crediting Service
    Under the elapsed time method of crediting service set forth in 
Sec.  1.410(a)-7, a plan generally is required to take into account the 
period of time that elapses while an employee is employed with the 
employer or employers maintaining the plan, regardless of the actual 
number of hours the employee would have been credited with during that 
period. For purposes of determining an employee's eligibility to 
participate, a plan generally may not require an employee to complete 
more than a 1-year period of service under the elapsed time method 
(regardless of whether the employee is classified by the employer or 
employers maintaining the plan as a part-time employee).
    The Treasury Department and the IRS received a comment in response 
to Notice 2020-68 requesting that a plan be permitted to determine an 
employee's eligibility to participate as a long-term, part-time 
employee using the elapsed time method. In general, this proposed 
regulation would permit a plan to use the elapsed time method to 
determine an employee's eligibility to participate in a qualified CODA. 
However, under the elapsed time method, an employee's eligibility to 
participate is not based upon the actual completion of a specified 
number of hours of service during a 12-month period. Therefore, an 
employee who becomes eligible to participate in a qualified CODA under 
the elapsed time method would not be eligible to participate solely by 
reason of completing the applicable number of consecutive 12-month 
periods with at least 500 hours of service during each period and would 
not be a long-term, part-time employee.
    In addition, this proposed regulation does not include an amendment 
to the elapsed time rules under Sec.  1.410(a)-7. Therefore, a plan may 
not require an employee, including an employee who is classified as a 
part-time employee, to complete more than a 1-year period of service 
under the elapsed time method

[[Page 82801]]

in order to be eligible to participate in a qualified CODA.
4. Equivalency Methods of Crediting Service
    As an alternative to the general method of crediting service, which 
is based upon the actual counting of hours of service, a plan may 
credit hours of service using equivalency methods permitted under 29 
CFR 2530.200b-3. Any equivalency method (or methods) used by a plan 
must be set forth in the plan document. For example, a plan generally 
may determine the number of hours of service to be credited to 
employees on the basis of months of employment if an employee is 
credited with 190 hours of service for each month for which the 
employee would be required to be credited with at least 1 hour of 
service. Under this equivalency method, the hours of service credited 
to an employee for each month are not affected by whether the employee 
is classified by the employer or employers maintaining the plan as a 
part-time employee.
    The Treasury Department and the IRS received a comment in response 
to Notice 2020-68 requesting that a plan be permitted to determine an 
employee's eligibility to participate as a long-term, part-time 
employee using an equivalency method to credit hours of service and 
requesting guidance regarding the application of the equivalency 
methods for purposes of determining an employee's eligibility to 
participate as a long-term, part-time employee (for example, whether 
the minimum number of hours that must be credited under an equivalency 
method would be reduced). Because an employee is credited with a 
specified number of hours under both the general method of crediting 
service and the equivalency methods, this proposed regulation would 
permit either the general method of crediting service or an otherwise 
permissible equivalency method to be used to determine whether an 
employee is credited with at least 500 hours of service during a 12-
month period. However, for purposes of determining an employee's 
eligibility to participate as a long-term, part-time employee, this 
proposed regulation does not include an amendment reducing the number 
of hours that otherwise would be credited to the employee under the 
applicable equivalency method.
C. Participation
1. Time of Participation
    This proposed regulation would set forth rules regarding the date 
by which a long-term, part-time employee must become eligible to make a 
cash or deferred election under a qualified CODA (that is, rules 
regarding the latest permissible entry date for a long-term, part-time 
employee).
    The Treasury Department and the IRS received a comment in response 
to Notice 2020-68 requesting confirmation that a plan may use the same 
entry date rules for long-term, part-time employees as it does for 
other eligible employees. Under section 401(k)(15)(D)(i), the entry 
date rules of section 410(a)(4) apply to an employee who is eligible to 
participate in an arrangement solely by reason of section 
401(k)(2)(D)(ii). Accordingly, proposed Sec.  1.401(k)-5(c)(1) reflects 
the rules of section 410(a)(4), including the rule in Sec.  1.410(a)-
4(b) relating to the treatment of an employee who separates from 
service prior to the employee's scheduled entry date.
2. Determination of 12-Month Periods
    Under section 410(a)(5)(A), in general, all years of service with 
the employer or employers maintaining the plan must be taken into 
account in computing an employee's period of service for purposes of 
section 410(a)(1). Similarly, proposed Sec.  1.401(k)-5(c)(2)(i) would 
clarify that, in general, all 12-month periods during which an employee 
is credited with at least 500 hours of service with the employer or 
employers maintaining the plan must be taken into account for purposes 
of determining whether an employee is eligible to participate as a 
long-term, part-time employee. For example, 12-month periods during 
which an employee is included in a classification of employees who are 
ineligible to participate in the qualified CODA generally must be taken 
into account for purposes of determining whether the employee is 
eligible to participate as a long-term, part-time employee. However, 
pursuant to section 112(b) of the SECURE Act, 12-month periods 
beginning before January 1, 2021, are not taken into account for 
purposes of determining whether an employee is eligible to participate 
as a long-term, part-time employee.
    With respect to an employee who is not yet eligible to participate 
in a qualified CODA, the rules of proposed Sec.  1.401(k)-5(c)(2)(i) 
would not affect the requirement that the employee complete the 
applicable number of consecutive 12-month periods during each of which 
the employee is credited with at least 500 hours of service in order to 
be eligible to participate as a long-term, part-time employee. Thus, if 
an employee who is not yet eligible to participate in a qualified CODA 
completes a 12-month period during which the employee is credited with 
fewer than 500 hours of service, then any prior 12-month periods during 
which the employee was credited with at least 500 (but less than 1,000) 
hours of service during each period would not be taken into account for 
purposes of determining whether the employee is eligible to participate 
in the CODA as a long-term, part-time employee.
    However, this proposed regulation does not include any provisions 
similar to the break-in-service rules under section 410(a)(5) for 
purposes of determining whether an employee is eligible to participate 
as a long-term, part-time employee. Thus, if an employee has become 
eligible to participate as a long-term, part-time employee, then the 
employee's eligibility to participate as a long-term, part-time 
employee would not be affected by the employee's completion of one or 
more 12-month periods during each of which the employee is credited 
with fewer than 500 hours of service (although, as explained in section 
I.D.1 of this Explanation of Provisions, a long-term, part-time 
employee is not required to be credited with a year of vesting service 
with respect to a 12-month period during which the employee is credited 
with fewer than 500 hours of service). Similarly, if a former employee 
who was eligible to participate as a long-term, part-time employee is 
rehired by an employer maintaining the plan, then the 12-month periods 
during which the employee previously was credited with at least 500 
hours of service with an employer maintaining the plan must be taken 
into account for purposes of determining whether the rehired employee 
is eligible to participate as a long-term, part-time employee.\3\
---------------------------------------------------------------------------

    \3\ If a former employee who previously was eligible to 
participate in a qualified CODA (but who was not eligible to 
participate as a long-term, part-time employee) is rehired by an 
employer maintaining the plan, then the employee generally would be 
immediately eligible to participate again in the CODA based on the 
employee's prior service with the employer or employers maintaining 
the plan. Therefore, that former employee would not be eligible to 
participate in the qualified CODA as a long-term, part-time employee 
after being rehired. However, if the former employee's eligibility 
service is disregarded because the plan applies the provisions of 
section 410(a)(5)(D), then that former employee may become eligible 
to participate in the qualified CODA as a long-term, part-time 
employee after being rehired.
---------------------------------------------------------------------------

    The Treasury Department and the IRS received a comment in response 
to Notice 2020-68 requesting clarification that the long-term, part-
time employee rules of section 401(k)(15) could apply to an employee 
even if 12-month periods beginning before January 1,

[[Page 82802]]

2021, are used to determine the employee's eligibility to participate 
in the qualified CODA. However, because section 112(b) of the SECURE 
Act provides that 12-month periods beginning before January 1, 2021, 
are not taken into account for purposes of section 401(k)(2)(D)(ii), 
this proposed regulation would exclude any 12-month period beginning 
before January 1, 2021, for purposes of determining whether an employee 
is eligible to participate as a long-term, part-time employee. 
Therefore, an employee would not be a long-term, part-time employee 
under the proposed regulation if one or more 12-month periods beginning 
before January 1, 2021, were taken into account for purposes of 
determining whether the employee completed the applicable number of 
consecutive 12-month periods during each of which the employee was 
credited with at least 500 hours of service.
    This proposed regulation also includes rules regarding the date on 
which a 12-month period may begin for purposes of determining an 
employee's eligibility to participate as a long-term, part-time 
employee.
    The Treasury Department and the IRS received a comment in response 
to Notice 2020-68 requesting confirmation that, although an employee's 
initial 12-month period for purposes of determining whether the 
employee is eligible to participate as a long-term, part-time employee 
must be based on the employee's date of hire, subsequent 12-month 
periods for the employee may be based on the plan year. Under section 
401(k)(15)(D)(ii), 12-month periods are determined in the same manner 
as under the last sentence of section 410(a)(3)(A). Accordingly, under 
proposed Sec.  1.401(k)-5(c)(2)(ii), an employee's initial 12-month 
period would begin on the first day for which the employee is entitled 
to be credited with an hour of service; however, the terms of the plan 
may provide that, beginning with the plan year that commences within 
that initial 12-month period, subsequent 12-month periods are 
determined by reference to the first day of the plan year. Moreover, 
the subsequent 12-month periods with respect to an employee may be 
determined by reference to the first day of the plan year regardless of 
whether the employee is credited with at least 500 hours of service 
during the employee's initial 12-month period (provided that the 
employee is not credited with at least 1,000 hours of service during 
the employee's initial 12-month period).
    If the plan provides that 12-month periods (after an employee's 
initial 12-month period) are determined by reference to the first day 
of the plan year, an employee's initial 12-month period and second 12-
month period are treated as consecutive 12-month periods for purposes 
of determining the employee's eligibility to participate as a long-
term, part-time employee. Therefore, if an employee is credited with at 
least 500 (but less than 1,000) hours of service during each of those 
12-month periods, the employee has completed two consecutive 12-month 
periods with at least 500 hours of service during each period for 
purposes of determining the employee's eligibility to participate as a 
long-term, part-time employee. This is the case even though an employee 
may be credited with certain hours of service for both the initial 12-
month period and the second 12-month period. For an employee hired 
prior to January 1, 2021, this proposed regulation provides that 12-
month periods beginning before January 1, 2021, are not taken into 
account for purposes of determining whether the employee is eligible to 
participate as a long-term, part-time employee. Thus, if 12-month 
periods after an employee's initial 12-month period are determined by 
reference to the first day of the plan year, then, with respect to an 
employee who was hired prior to January 1, 2021, the first 12-month 
period for purposes of determining whether the employee is eligible to 
participate as a long-term, part-time employee generally would be 
determined by reference to the first day of the first plan year 
beginning on or after January 1, 2021.
3. Eligibility Conditions Not Based on Age or Service
    The Treasury Department and the IRS received comments in response 
to Notice 2020-68 requesting clarification that an employee who 
otherwise would be eligible to participate in a qualified CODA as a 
long-term, part-time employee may be excluded from participating in the 
CODA if the employee is a member of a job classification that is not 
based on age or service and whose members are excluded from 
participating in the CODA under the terms of the plan.
    In response to these comments, this proposed regulation would 
address whether a plan may impose conditions that are not based on age 
or service in order for an employee to be eligible to participate in a 
qualified CODA as a long-term, part-time employee. In general, section 
401(k)(15) does not preclude a plan that includes a CODA from 
establishing conditions that must be satisfied in order for an employee 
to be eligible to participate in the CODA. However, a CODA will fail to 
satisfy section 401(k)(2)(D) if, as a condition of participation, the 
plan imposes an age or service requirement (or imposes a condition that 
has the effect of an age or service requirement) that requires an 
employee to complete a period of service with the employer or employers 
maintaining the plan that extends beyond the close of the earlier of 
the periods described in section 401(k)(2)(D)(i) and (ii).
    Accordingly, proposed Sec.  1.401(k)-5(c)(3) would clarify that the 
long-term, part-time employee rules of Sec.  1.401(k)-5 do not preclude 
a plan from establishing an eligibility condition that must be 
satisfied in order for an employee to participate in the CODA, provided 
that the condition is not a proxy for imposing an age or service 
requirement (that is, the condition does not have the effect of 
imposing an age or service requirement with the employer or employers 
maintaining the plan) that requires an employee to complete a period of 
service with the employer or employers maintaining the plan that 
extends beyond the close of the earlier of the periods described in 
section 401(k)(2)(D)(i) and (ii).\4\ However, with respect to an 
employee who otherwise would be eligible to participate in a qualified 
CODA as a long-term, part-time employee, but who is excluded from 
participating as a long-term, part-time employee due to conditions 
imposed by the plan, the rules of section 401(k)(15)(B)(i) and (ii) 
(disregarding long-term, part-time employees for purposes of 
nondiscrimination and coverage testing and top-heavy benefits) do not 
apply to that excluded employee.
---------------------------------------------------------------------------

    \4\ The rules of proposed Sec.  1.401(k)-5(c)(3) are intended to 
align with those of Sec.  1.410(a)-3(d) and (e).
---------------------------------------------------------------------------

    In addition, the maximum period of service that the employer or 
employers maintaining a plan may require under section 401(k)(2)(D) 
applies regardless of an employee's job classification. For example, it 
would not be permissible for an employee classified as a temporary 
employee to be required to complete a period of service that is 
described in section 401(k)(2)(D)(ii). This would not be permissible 
because section 401(k)(2)(D) provides that a qualified CODA may not 
require, as a condition of participation, that an employee complete a 
period of service that extends beyond the close of the earlier of the 
periods described in section 401(k)(2)(D)(i) and (ii). Thus, if the 
employee were to complete the period described in section 410(a)(1) 
(determined without regard to section

[[Page 82803]]

410(a)(1)(B)(i)), then the employee must become eligible to participate 
in the CODA under section 401(k)(2)(D)(i).
    Proposed Sec.  1.401(k)-5(c)(1)(iii) would provide rules addressing 
the date of participation that apply in the case of an employee who 
would otherwise be eligible to participate in the arrangement as a 
long-term, part-time employee but who does not participate solely 
because the employee does not satisfy the plan's eligibility conditions 
(other than age or service) as of the date the employee would have 
participated in the arrangement had the employee satisfied those 
conditions. If such an employee later satisfies those conditions, then 
the employee must become eligible to participate in the arrangement 
immediately upon satisfying those conditions.
4. Elective Contributions
    To avoid a circumvention of the requirement that a long-term, part-
time employee be eligible to make elective contributions under a 
qualified CODA, proposed Sec.  1.401(k)-5(c)(4) would provide, in 
general, that the right to make elective contributions by a long-term, 
part-time employee who is an eligible non-highly compensated employee 
(NHCE) may not be restricted in a manner that would not be permitted 
for an NHCE under a safe harbor section 401(k) plan under Sec.  
1.401(k)-3(c)(6). However, a SIMPLE 401(k) plan would be permitted to 
limit the amount of elective contributions made by a long-term, part-
time employee under the plan to the extent needed to satisfy the 
elective contribution limitation for SIMPLE 401(k) plans under section 
401(k)(11)(B)(i)(I) and (m)(10)(A).
D. Vesting
1. Years of Vesting Service Taken Into Account
    This proposed regulation would provide vesting rules for purposes 
of determining whether a long-term, part-time employee (or former long-
term, part-time employee, as explained in section I.D.2 of this 
Explanation of Provisions) has a nonforfeitable right to employer 
contributions under the plan (other than elective contributions).
    In general, the nonforfeitable right of a long-term, part-time 
employee (or former long-term, part-time employee) to employer 
contributions under the plan (other than elective contributions) would 
be determined under the rules of section 411. However, pursuant to 
section 401(k)(15)(B)(iii), proposed Sec.  1.401(k)-5(d)(1)(i)(A) would 
provide that each 12-month period during which a long-term, part-time 
employee (or former long-term, part-time employee) is credited with at 
least 500 hours of service (as defined in section 410(a)(3)(C)) with 
the employer or employers maintaining the plan is treated as a year of 
vesting service.
    The Treasury Department and the IRS received a comment in response 
to Notice 2020-68 requesting clarification that, for purposes of 
determining vesting service for a long-term, part-time employee, a plan 
may use the same vesting computation period that it uses for other 
employees and is not required to use the long-term, part-time 
employee's eligibility computation period. Under section 411(a)(5)(A), 
a vesting computation period generally may be a calendar year, plan 
year, or other 12-consecutive month period designated by the plan (and 
not prohibited under regulations prescribed by the Secretary of Labor). 
Section 401(k)(15)(D)(ii) provides that 12-month periods are determined 
in the same manner as under the last sentence of section 410(a)(3)(A). 
However, the introductory language of section 401(k)(15) states that it 
applies ``for purposes of paragraph (2)(D)(ii)'' (that is, the 
eligibility rules of section 401(k)(2)(D)(ii)). Based on this language, 
this proposed regulation would apply the rule under section 
401(k)(15)(D)(ii) for purposes of section 401(k)(2)(D)(ii) but would 
not extend the application of that rule to the vesting rules of section 
401(k)(15)(B)(iii). Accordingly, in response to this comment, proposed 
Sec.  1.401(k)-5(d)(1)(i)(A) would clarify that a plan may designate 
any 12-consecutive month period that is not prohibited for use under 
section 411(a) for purposes of determining a long-term, part-time 
employee's (or former long-term, part-time employee's) vesting service.
    In addition, pursuant to section 401(k)(15)(B)(iii), proposed Sec.  
1.401(k)-5(d)(1)(iii) would provide that, for purposes of determining 
whether a long-term, part-time employee (or former long-term, part-time 
employee) has incurred a 1-year break in service, section 411(a)(6)(A) 
is applied by substituting ``at least 500 hours of service'' for ``more 
than 500 hours of service.''
    This proposed regulation also would provide guidance regarding 12-
month periods that must be taken into account for purposes of 
determining a long-term, part-time employee's (or former long-term, 
part-time employee's) years of vesting service. As described in section 
II of the Background portion of this preamble, Q&A C-1 of Notice 2020-
68 provides that, unless a long-term, part-time employee's years of 
service may be disregarded under section 411(a)(4) (for example, years 
of service before the employee attains age 18), all years of service 
with the employer or employers maintaining the plan must be taken into 
account for purposes of determining the long-term, part-time employee's 
nonforfeitable right to employer contributions under section 
401(k)(15)(B)(iii), including 12-month periods beginning before January 
1, 2021.
    However, section 125(d) of the SECURE 2.0 Act amended section 
112(b) of the SECURE Act (effective as if included in section 112 of 
the SECURE Act) to provide that 12-month periods beginning before 
January 1, 2021, are not taken into account for purposes of either the 
eligibility rule described in section 401(k)(2)(D)(ii) or the vesting 
rules of section 401(k)(15)(B)(iii). Thus, Q&A C-1 of Notice 2020-68 
was effectively rendered obsolete by the enactment of section 125(d) of 
the SECURE 2.0 Act.
    Accordingly, proposed Sec.  1.401(k)-5(d)(1)(i)(B) generally would 
require that all 12-month periods of service with the employer or 
employers maintaining the plan must be taken into account for purposes 
of determining the nonforfeitable right of a long-term, part-time 
employee (or former long-term, part-time employee) to employer 
contributions (other than elective contributions), unless the period of 
service of the employee may be disregarded under section 411(a) (which 
takes into account section 411(a)(4), (a)(6), and (a)(7)(B)). In 
addition, proposed Sec.  1.401(k)-5(d)(1)(i)(B) would reflect section 
125(d) of the SECURE 2.0 Act by permitting any 12-month period 
beginning before January 1, 2021, to be excluded for purposes of 
determining the nonforfeitable right of a long-term, part-time employee 
(or former long-term, part-time employee) to employer contributions 
(other than elective contributions) under the plan.
2. Former Long-Term, Part-Time Employees
    This proposed regulation would provide rules for an employee who 
becomes eligible to participate in a qualified CODA as a long-term, 
part-time employee but who subsequently completes 1 year of service 
under section 410(a)(1)(A)(ii) or who ceases to satisfy the plan's 
eligibility conditions (other than age or service conditions).
    Under section 401(k)(15)(B)(iv), the rules of section 401(k)(15)(B) 
(other than the vesting rules of section 401(k)(15)(B)(iii)) cease to 
apply to any employee as of the first plan year beginning after the 
plan year in which

[[Page 82804]]

the employee satisfies the requirements of section 401(k)(2)(D) without 
regard to section 401(k)(2)(D)(ii) (that is, satisfies the requirements 
of section 410(a)(1)(A)(ii) without regard to section 410(a)(1)(B)(i)). 
Thus, the nondiscrimination and coverage testing provisions of section 
401(k)(15)(B)(i) and the top-heavy benefit provisions of section 
401(k)(15)(B)(ii) cease to apply to any employee as of the first plan 
year beginning after the plan year in which the employee satisfies the 
requirements of section 401(k)(2)(D) without regard to section 
401(k)(2)(D)(ii), but the vesting rules of section 401(k)(15)(B)(iii) 
continue to apply to the employee.
    Proposed Sec.  1.401(k)-5(d)(2) would reflect the rules of section 
401(k)(15)(B)(iv) by providing that an employee ceases to be a long-
term, part-time employee and becomes a former long-term, part-time 
employee as of the first day of the first plan year beginning after the 
plan year in which the employee satisfies the requirements of section 
401(k)(2)(D) without regard to section 401(k)(2)(D)(ii). The 
nondiscrimination provisions of proposed Sec.  1.401(k)-5(e)(1) (which 
are explained in section I.E.1 of this Explanation of Provisions) and 
the employer election provisions of proposed Sec.  1.401(k)-5(f)(1) and 
(2) (which are explained in section I.F of this Explanation of 
Provisions) would not apply to a former long-term, part-time employee 
(regardless of whether the former long-term, part-time employee 
subsequently completes one or more 12-month periods during each of 
which the employee is credited with at least 500 (but less than 1,000) 
hours of service). However, the vesting rules of proposed Sec.  
1.401(k)-5(d)(1) (as explained in section I.D.1 of this Explanation of 
Provisions) would continue to apply to a former long-term, part-time 
employee. Thus, a former long-term, part-time employee would continue 
to be credited with a year of vesting service for any 12-month period 
during which the former long-term, part-time employee is credited with 
at least 500 hours of service with the employer or employers 
maintaining the plan (unless the period of service may be disregarded 
under section 411(a)).
    The Treasury Department and the IRS received a comment in response 
to Notice 2020-68 requesting clarification regarding the application of 
the vesting rules of section 401(k)(15)(B)(iii) and (iv) with respect 
to an employee who: (1) becomes eligible to participate as a long-term, 
part-time employee, but who subsequently completes 1 year of service 
under section 410(a)(1)(A)(ii); or (2) becomes eligible to participate 
because the employee completed 1 year of service under section 
410(a)(1)(A)(ii), but who also completes (before or after becoming 
eligible to participate) one or more 12-month periods during each of 
which the employee is credited with at least 500 (but less than 1,000) 
hours of service.
    Under this proposed regulation, the vesting rules of proposed Sec.  
1.401(k)-5(d)(1) would continue to apply to a long-term, part-time 
employee who completes 1 year of service under section 
410(a)(1)(A)(ii). However, an employee who becomes eligible to 
participate in a qualified CODA because the employee completes 1 year 
of service under section 410(a)(1)(A)(ii) would not be eligible to 
participate in the CODA solely by reason of completing the applicable 
number of consecutive 12-month periods during each of which the 
employee is credited with at least 500 hours of service. Therefore, the 
employee would not be a long-term, part-time employee, and the vesting 
rules of proposed Sec.  1.401(k)-5(d)(1) would not apply to the 
employee (regardless of whether the employee also completes, before or 
after becoming eligible to participate in the qualified CODA, one or 
more 12-month periods during each of which the employee is credited 
with at least 500 (but less than 1,000) hours of service).
    Section 401(k)(15) does not address a long-term, part-time employee 
who ceases to satisfy a plan's eligibility conditions (other than age 
or service conditions) for participation in the qualified CODA included 
in the plan. However, this proposed regulation would provide rules 
similar to those of section 401(k)(15)(B)(iv) with respect to a long-
term, part-time employee who ceases to be eligible to participate in a 
qualified CODA. Therefore, proposed Sec.  1.401(k)-5(d)(2)(ii) would 
provide that a long-term, part-time employee becomes a former long-
term, part-time employee as of the first day of the first plan year 
beginning after the earlier of the plan year in which the employee: (1) 
satisfies the requirements of section 401(k)(2)(D) without regard to 
section 401(k)(2)(D)(ii); or (2) ceases to satisfy the plan's 
eligibility conditions (other than age or service conditions). 
Regardless of the reason that a long-term, part-time employee becomes a 
former long-term, part-time employee, this proposed regulation would 
provide that the nondiscrimination provisions of proposed Sec.  
1.401(k)-5(e)(1) and the employer election provisions of proposed Sec.  
1.401(k)-5(f)(1) and (2) do not apply to a former long-term, part-time 
employee (although the vesting rules of proposed Sec.  1.401(k)-5(d)(1) 
would continue to apply to a former long-term, part-time employee).
    Unlike the rules that would apply to a long-term, part-time 
employee who becomes a former long-term, part-time employee by reason 
of satisfying the requirements of section 401(k)(2)(D) without regard 
to section 401(k)(2)(D)(ii) (that is, by reason of having completed 1 
year of service under section 410(a)(1)(A)(ii)), proposed Sec.  
1.401(k)-5(d)(2)(iii) would provide that a long-term, part-time 
employee who ceases to satisfy the plan's eligibility conditions (other 
than age or service conditions) during a plan year generally will 
return to long-term, part-time employee status as of the first day of 
the plan year during which the employee again satisfies those 
conditions. However, that employee would not return to long-term, part-
time employee status if the employee also is a former long-term, part-
time employee by reason of having completed 1 year of service under 
section 410(a)(1)(A)(ii). Although proposed Sec.  1.401(k)-5(d)(2)(iii) 
would permit an employee's status to change from that of a former long-
term, part-time employee to a long-term, part-time employee during the 
plan year, this proposed regulation would not permit an employee to be 
both a long-term, part-time employee and a former long-term, part-time 
employee for that plan year. Similarly, under this proposed regulation, 
if a long-term, part-time employee ceases to satisfy the plan's 
eligibility conditions (other than age or service conditions) during a 
plan year, but again satisfies those conditions during the same plan 
year, the employee would remain a long-term, part-time employee for the 
entire plan year.
    Accordingly, proposed Sec.  1.401(k)-5(d)(2)(i) would define a 
former long-term, part-time employee as an employee who became eligible 
to participate in the arrangement as a long-term, part-time employee; 
subsequently ceased to be a long-term, part-time employee because the 
employee was described in proposed Sec.  1.401(k)-5(d)(2)(ii)(A) or 
(B); and has not returned to long-term, part-time employee status in 
accordance with proposed Sec.  1.401(k)-5(d)(2)(iii). Thus, under this 
proposed definition, an employee first must become eligible to 
participate in a qualified CODA as a long-term, part-time employee 
before the employee may become a former long-term, part-time employee.

[[Page 82805]]

E. Nonelective and Matching Contributions
1. General Rule
    This proposed regulation reflects the nondiscrimination provisions 
of section 401(k)(15)(B)(i)(I). Proposed Sec.  1.401(k)-5(e)(1) would 
provide that, notwithstanding section 401(a)(4), neither nonelective 
nor matching contributions are required to be made on behalf of long-
term, part-time employees, even if those contributions are made on 
behalf of other eligible employees. However, as explained in section 
I.D.2 of this Explanation of Provisions, proposed Sec.  1.401(k)-
5(e)(1) would not apply to former long-term, part-time employees.
2. Coordination With Employer Elections
    In addition to section 401(a)(4), other Code sections affect 
whether contributions must be made on behalf of long-term, part-time 
employees. Accordingly, proposed Sec.  1.401(k)-5(e)(2) would address 
the safe harbor section 401(k) plan contribution requirements under 
section 401(k)(12) and (13), the safe harbor section 401(m) plan 
contribution requirements under section 401(m)(11) and (12), the top-
heavy benefit requirements under section 416, and the SIMPLE 401(k) 
plan contribution requirements under section 401(k)(11) and (m)(10).
    As explained in section I.F.1 of this Explanation of Provisions, 
this proposed regulation would provide that the employer or employers 
maintaining a plan are permitted to elect to exclude long-term, part-
time employees for purposes of determining whether the plan satisfies 
the ADP safe harbor provisions of section 401(k)(12) and (13), the ACP 
safe harbor provisions of section 401(m)(11) and (12), and certain 
other nondiscrimination and coverage testing provisions. Similarly, as 
explained in section I.F.2 of this Explanation of Provisions, this 
proposed regulation would permit the employer or employers maintaining 
the plan to elect to exclude long-term, part-time employees for 
purposes of determining whether the plan satisfies the top-heavy 
vesting and benefit requirements of section 416(b) and (c). However, 
this proposed regulation would not permit an employer to elect to 
exclude long-term, part-time employees for purposes of determining 
whether a plan satisfies the SIMPLE 401(k) provisions of section 
401(k)(11) and (m)(10).
    Therefore, proposed Sec.  1.401(k)-5(e)(2)(i) would clarify that if 
long-term, part-time employees are excluded for purposes of determining 
whether a plan satisfies the ADP safe harbor provisions of section 
401(k)(12) or (13) (and, if applicable, the ACP safe harbor provisions 
of section 401(m)(11) or (12)), then the plan will not fail to satisfy 
those provisions merely because the employer does not make a 
nonelective or matching contribution on behalf of an eligible NHCE who 
is a long-term, part-time employee (or makes a nonelective or matching 
contribution that would not satisfy the safe harbor contribution 
requirements on behalf of the eligible NHCE). Similarly, proposed Sec.  
1.401(k)-5(e)(2)(ii) would clarify that if long-term, part-time 
employees are excluded for purposes of determining whether the plan 
satisfies the minimum benefit requirements of section 416(c) for the 
plan year, then the plan will not fail to satisfy the minimum benefit 
requirements of section 416(c) merely because the employer contribution 
(if any) made for the plan year on behalf of a non-key employee who is 
a long-term, part-time employee does not satisfy those requirements.
    However, proposed Sec.  1.401(k)-5(e)(2)(iii) would clarify that, 
because an employer may not elect under this proposed regulation to 
exclude long-term, part-time employees from the application of the 
SIMPLE 401(k) provisions of section 401(k)(11) and (m)(10), a plan 
intended to satisfy the SIMPLE 401(k) provisions of section 401(k)(11) 
or (m)(10) must satisfy the matching or nonelective contribution 
requirements of Sec.  1.401(k)-4(e) with respect to long-term, part-
time employees.
F. Employer Elections
1. Nondiscrimination and Coverage
    This proposed regulation generally reflects the provisions of 
section 401(k)(15)(B)(i)(II). Section 401(k)(15)(B)(i)(II) permits an 
employer to elect to exclude long-term, part-time employees from the 
application of the nondiscrimination requirements of section 401(a)(4), 
the ADP test of section 401(k)(3), the ADP safe harbor provisions of 
section 401(k)(12) and (13), the ACP test of section 401(m)(2), the ACP 
safe harbor provisions of section 401(m)(11) and (12), and the minimum 
coverage requirements of section 410(b). Accordingly, proposed Sec.  
1.401(k)-5(f)(1) generally would permit an employer to elect to exclude 
long-term, part-time employees (but not former long-term, part-time 
employees, as explained in section I.D.2 of this Explanation of 
Provisions) for purposes of determining whether a plan satisfies those 
nondiscrimination and minimum coverage requirements.
    The nondiscrimination and minimum coverage requirements listed in 
section 401(k)(15)(B)(i)(II) do not include the SIMPLE 401(k) 
provisions of section 401(k)(11) and (m)(10). Accordingly, an employer 
election under proposed Sec.  1.401(k)-5(f)(1) would not exclude long-
term, part-time employees for purposes of determining whether a plan 
satisfies the SIMPLE 401(k) requirements of section 401(k)(11) and 
(m)(10).
    For purposes of section 410(b), if long-term, part-time employees 
are not excluded for purposes of determining whether the plan satisfies 
section 410(b) pursuant to an employer election under proposed Sec.  
1.401(k)-5(f)(1), then those employees generally will be otherwise 
excludable employees for purposes of section 410(b)(4)(B) and Sec.  
1.410(b)-6(b)(3) because those long-term, part-time employees will not 
have satisfied the service requirements of section 410(a)(1) (without 
regard to section 410(a)(1)(B)). However, former long-term, part-time 
employees who have completed 1 year of service under section 
410(a)(1)(A)(ii) will not be otherwise excludable employees because 
those former long-term, part-time employees will have satisfied the 
minimum age and service requirements of section 410(a)(1) (without 
regard to section 410(a)(1)(B)).
    The Treasury Department and the IRS received a comment in response 
to Notice 2020-68 requesting clarification that an employer may elect 
to exclude long-term, part-time employees for purposes of certain 
nondiscrimination and coverage testing provisions listed in section 
401(k)(15)(B)(i)(II), but include long-term, part-time employees for 
other of those provisions. This proposed regulation would not provide 
for such an option because of the interconnection among the 
nondiscrimination and coverage testing provisions listed in section 
401(k)(15)(B)(i)(II) and the risk that disregarding long-term, part-
time employees for purposes of some (but not all) of those 
nondiscrimination and coverage testing provisions could result in 
discrimination against NHCEs who are not long-term, part-time 
employees. Accordingly, this proposed regulation would clarify that an 
employer election under proposed Sec.  1.401(k)-5(f)(1) applies for 
purposes of every nondiscrimination and coverage testing provision 
listed in section 401(k)(15)(B)(i)(II) (to the extent the provision 
otherwise would apply to the plan) and applies with respect to all 
long-term, part-time employees who are eligible to participate in the 
qualified CODA.

[[Page 82806]]

    With respect to a plan that is intended to satisfy the ADP safe 
harbor provisions of section 401(k)(12) or (13), this proposed 
regulation would clarify that an election under proposed Sec.  
1.401(k)-5(f)(1) must be set forth in the plan and satisfy the plan 
year requirements of Sec.  1.401(k)-3(e). This proposed regulation 
would set forth a similar requirement for a plan that is intended to 
satisfy the ACP safe harbor provisions of section 401(m)(11) or (12). 
Therefore, with respect to these plans, in order for an election to 
satisfy the conditions of proposed Sec.  1.401(k)-5(f)(1), the terms of 
the plan must provide clearly that long-term, part-time employees are 
excluded for purposes of the ADP safe harbor provisions of section 
401(k)(12) or (13), the ACP safe harbor provisions of section 
401(m)(11) or (12), and any other provisions under proposed Sec.  
1.401(k)-5(f)(1)(i) that otherwise would apply to the plan.
    With respect to a plan that is not intended to satisfy the ADP safe 
harbor provisions of section 401(k)(12) or (13) or the ACP safe harbor 
provisions of section 401(m)(11) or (12) for a plan year, this proposed 
regulation would not require an election under proposed Sec.  1.401(k)-
5(f)(1) to be set forth in the plan. However, in order for the employer 
or employers maintaining the plan to make an election under proposed 
Sec.  1.401(k)-5(f)(1), the terms of the plan would need to provide 
enabling language. Thus, in the case of a plan that is not intended to 
satisfy the ADP safe harbor provisions of section 401(k)(12) or (13) or 
the ACP safe harbor provisions of section 401(m)(11) or (12) for a plan 
year, if the plan document does not include enabling language, or an 
election under proposed Sec.  1.401(k)-5(f)(1) is not made, then long-
term, part-time employees would not be excluded for purposes of 
determining whether the plan satisfies the nondiscrimination 
requirements of section 401(a)(4), the ADP test of section 401(k)(3), 
the ACP test of section 401(m)(2), or the minimum coverage requirements 
of section 410(b) (to the extent those provisions would otherwise apply 
to the plan).
2. Top-Heavy
    Proposed Sec.  1.401(k)-5(f)(2) reflects the provisions of section 
401(k)(15)(B)(ii), which permit an employer to elect to exclude all 
long-term, part-time employees from the application of the top-heavy 
vesting and benefit requirements under section 416(b) and (c). As 
explained in section I.D.2 of this Explanation of Provisions, the 
election under proposed Sec.  1.401(k)-5(f)(2) would not apply to 
former long-term, part-time employees. In addition, this proposed 
regulation would clarify that an election under section 
401(k)(15)(B)(ii) does not apply for purposes of determining whether a 
plan is a top-heavy plan (as defined in section 416(g)).
    However, section 125(e) of the SECURE 2.0 Act amends the special 
rules under section 416(g)(4)(H) of the Code for cash or deferred 
arrangements using alternative methods of meeting nondiscrimination 
requirements to provide that the term ``top-heavy plan'' does not 
include a plan solely because that plan does not provide nonelective or 
matching contributions to employees described in section 
401(k)(15)(B)(i). As explained in section I.E.2 of this Explanation of 
Provisions, a plan does not fail to satisfy the ADP safe harbor 
provisions of section 401(k)(12) or (13) or the ACP safe harbor 
provisions of section 401(m)(11) or (12) (including for purposes of 
applying section 416(g)(4)(H) of the Code) merely because the employer 
does not make a nonelective or matching contribution on behalf of an 
eligible NHCE who is a long-term, part-time employee, provided that 
long-term, part-time employees are excluded for purposes of determining 
whether the plan satisfies those provisions pursuant to an election 
that satisfies the requirements of proposed Sec.  1.401(k)-5(f)(1). 
Accordingly, proposed Sec.  1.401(k)-5(f)(2) would clarify that, in the 
case of an employer that makes an election described in proposed Sec.  
1.401(k)-5(f)(1) (which has the effect of excluding long-term, part-
time employees for purposes of determining whether the plan satisfies 
the ADP and ACP safe harbor provisions), the plan will not fail to be 
excluded from the definition of a ``top-heavy plan'' under section 
416(g)(4)(H) merely because the employer does not make nonelective or 
matching contributions on behalf of long-term, part-time employees (or 
makes nonelective or matching contributions that do not satisfy the 
requirements for safe harbor contributions).
    The employer election regarding nondiscrimination and coverage 
testing under proposed Sec.  1.401(k)-5(f)(1) and the employer election 
regarding top-heavy benefits under proposed Sec.  1.401(k)-5(f)(2) 
would be separate elections. In order for an election to satisfy the 
conditions of proposed Sec.  1.401(k)-5(f)(2), the terms of the plan 
would be required to provide that long-term, part-time employees are 
excluded from the application of the vesting and benefit requirements 
of section 416(b) and (c).
3. Additional Employer Contributions
    As explained in section I.E of this Explanation of Provisions, this 
proposed regulation generally would not require an employer to make 
nonelective or matching contributions on behalf of a long-term, part-
time employee. However, the Treasury Department and the IRS received a 
comment in response to Notice 2020-68 requesting clarification that an 
employer may elect under section 401(k)(15)(B)(i)(II) to exclude long-
term, part-time employees from nondiscrimination and coverage testing, 
even if the employer makes employer contributions (other than elective 
contributions) on behalf of long-term, part-time employees under the 
plan.
    Under this proposed regulation, an election to exclude long-term, 
part-time employees for purposes of nondiscrimination and coverage 
testing under proposed Sec.  1.401(k)-5(f)(1), and an election to 
exclude long-term, part-time employees for purposes of top-heavy 
benefits under proposed Sec.  1.401(k)-5(f)(2), would not be 
conditioned upon long-term, part-time employees being ineligible to 
receive employer contributions other than elective contributions under 
the plan. Accordingly, this proposed regulation generally would permit 
the employer or employers maintaining the plan to elect to exclude 
long-term, part-time employees under proposed Sec.  1.401(k)-5(f)(1) 
and (2), even if the employer or employers maintaining the plan make 
nonelective or matching contributions on behalf of long-term, part-time 
employees under the plan. If a plan is intended to satisfy the ADP safe 
harbor provisions of section 401(k)(12) or (13), or the ACP safe harbor 
provisions of section 401(m)(11) or (12), and the employer elects to 
exclude long-term, part-time employees under proposed Sec.  1.401(k)-
5(f)(1) for purposes of determining whether the plan satisfies those 
provisions (and any other provisions under proposed Sec.  1.401(k)-
5(f)(1)(i) that otherwise would apply to the plan), then any 
nonelective or matching contributions made on behalf of long-term, 
part-time employees under the plan would not be safe harbor 
contributions for purposes of Sec.  1.401(k)-3 or 1.401(m)-3 but, as 
described in section I.F.2 of this Explanation of Provisions, the plan 
would continue to be excluded from the definition of a ``top-heavy 
plan''.

[[Page 82807]]

II. Other Issues

A. Catch-Up Contributions and Roth Elective Contributions
    Section 112 of the SECURE Act does not address whether a long-term, 
part-time employee may be a catch-up eligible participant for purposes 
of making catch-up contributions under section 414(v) and Sec.  
1.414(v)-1. However, Sec.  1.414(v)-1(g)(3) provides that an employee 
is a catch-up eligible participant for a taxable year if: (1) the 
employee is eligible to make elective deferrals under an applicable 
employer plan (without regard to section 414(v) or Sec.  1.414(v)-1), 
and (2) the employee's 50th or higher birthday would occur before the 
end of the employee's taxable year. An employee who is eligible to 
participate in a qualified CODA as a long-term, part-time employee 
would be eligible to make elective deferrals under an applicable 
employer plan for purposes of Sec.  1.414(v)-1(g)(3). Accordingly, a 
long-term, part-time employee is a catch-up eligible participant for a 
taxable year if the employee's 50th or higher birthday would occur 
before the end of the employee's taxable year.
    Under the universal availability requirements of section 414(v)(4) 
and Sec.  1.414(v)-1(e), a section 401(k) plan (or other applicable 
employer plan) that offers catch-up contributions and that is otherwise 
subject to section 401(a)(4) generally will not satisfy the 
requirements of section 401(a)(4) unless all catch-up eligible 
participants who participate under any applicable employer plan 
maintained by the employer are provided an effective opportunity to 
make the same dollar amount of catch-up contributions. This proposed 
regulation would not amend the catch-up contribution rules of Sec.  
1.414(v)-1. However, as explained in section I.F.1 of this Explanation 
of Provisions, proposed Sec.  1.401(k)-5(f)(1) would permit an employer 
to elect to exclude long-term, part-time employees for purposes of 
certain nondiscrimination and coverage testing provisions, including 
for purposes of section 401(a)(4). Therefore, long-term, part-time 
employees would be disregarded for purposes of the universal 
availability requirements of section 414(v)(4) and Sec.  1.414(v)-1(e), 
if the employer elects to exclude long-term, part-time employees in 
accordance with the provisions of proposed Sec.  1.401(k)-5(f)(1).
    Similarly, section 401(k)(15) does not address whether a section 
401(k) plan may permit a long-term, part-time employee to make 
designated Roth contributions. However, under Sec.  1.401(k)-1(f)(1), a 
designated Roth contribution is an elective contribution under a 
qualified CODA that (to the extent permitted under the plan) satisfies 
certain conditions. Section 1.401(k)-1(f)(4) further provides that a 
designated Roth contribution must satisfy the requirements applicable 
to elective contributions made under a qualified CODA and is treated as 
an employer contribution for purposes of certain Code sections, 
including section 401(k). Accordingly, a section 401(k) plan may permit 
long-term, part-time employees to make designated Roth contributions.
    Under Sec.  1.401(k)-1(a)(4)(iv)(B), the right to make designated 
Roth contributions is a right or feature subject to the requirements of 
section 401(a)(4). However, if the employer elects to exclude long-
term, part-time employees for purposes of determining whether a plan 
satisfies section 401(a)(4) in accordance with the provisions of 
proposed Sec.  1.401(k)-5(f)(1), long-term, part-time employees would 
be disregarded for purposes of determining whether the right to make 
designated Roth contributions under the plan satisfies section 
401(a)(4) and Sec.  1.401(a)(4)-4.
B. Form 5500 and Form 5500-SF--Independent Qualified Public Accountant 
Audit
    The Treasury Department and the IRS received a comment in response 
to Notice 2020-68 requesting that long-term, part-time employees be 
excluded for purposes of determining whether a plan is exempt from the 
requirement to be audited annually by an independent qualified public 
accountant (IQPA). The Treasury Department and the IRS also received a 
comment in response to Notice 2020-68 requesting that the determination 
of whether a plan is exempt from the annual audit requirement be based 
on the number of plan participants (including long-term, part-time 
employees) with account balances as of the beginning of the plan year, 
rather than the total number of participants at the beginning of the 
plan year. The annual audit requirement of section 103(a)(3) of ERISA 
falls under the regulatory and interpretive authority of the Department 
of Labor and is outside the scope of this proposed regulation.\5\
---------------------------------------------------------------------------

    \5\ After these comments were received, revisions were made to 
the forms and instructions for the Form 5500, ``Annual Return/Report 
of Employee Benefit Plan,'' and Form 5500-SF, ``Short Form Annual 
Return/Report of Small Employee Benefit Plan,'' for plan years 
beginning on or after January 1, 2023. The new instructions provide 
that only participants with an account balance are counted for 
purposes of the small plan audit waiver of annual examination and 
report of an IQPA under 29 CFR 2520.104-46. See 88 FR 11984 
(February 24, 2023).
---------------------------------------------------------------------------

Proposed Applicability Date

    Section 1.401(k)-5 is proposed to apply to plan years that begin on 
or after January 1, 2024. Prior to the date a Treasury decision 
revising Sec.  1.401(k)-5 to implement rules for long-term, part-time 
employees is published in the Federal Register, taxpayers may rely on 
the rules set forth in this notice of proposed rulemaking.

Availability of IRS Documents

    For copies of recently issued revenue procedures, revenue rulings, 
notices and other guidance published in the Internal Revenue Bulletin, 
please visit the IRS website at www.irs.gov or contact the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402.

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The information required under this regulation is considered usual 
and customary records kept by respondents during the normal course of 
business in administering their retirement plans. These customary 
business records impose no additional burden on respondents and are not 
required to be reviewed by the Office of Management and Budget (OMB) 
per 5 CFR 1320.3(b)(2).

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act, it is hereby certified 
that this regulation will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
several factors. First, the proposed regulation generally is intended 
to reflect certain statutory changes that affect section 401(k) plans. 
The proposed regulation primarily would conform the current regulations 
under section 401(k) with changes made by section 112 of the SECURE Act 
and sections 125 and 401 of the SECURE 2.0 Act.
    Second, although the proposed regulation might affect a substantial

[[Page 82808]]

number of small entities, the economic impact of the proposed 
regulation is not expected to be significant. The changes made by 
section 112 of the SECURE Act may require certain small entities that 
sponsor section 401(k) plans to revise the eligibility service 
requirements under those plans so that long-term, part-time employees 
are permitted to make cash or deferred elections. However, except with 
respect to SIMPLE 401(k) plans, those small entities would not be 
required to make nonelective or matching contributions on behalf of 
long-term, part-time employees. Any additional recordkeeping or 
administrative costs resulting from the participation of long-term, 
part-time employees in section 401(k) plans sponsored by small entities 
are not expected to be significant.
    With respect to small entities that sponsor SIMPLE 401(k) plans, 
the proposed regulation would require those small entities to make 
nonelective or matching contributions under those SIMPLE 401(k) plans 
on behalf of any long-term, part-time employees in order to satisfy 
section 112 of the SECURE Act. However, if a small entity sponsors a 
section 401(k) plan, it is expected that the plan typically would be 
subject to the ADP test or designed to satisfy the requirements for a 
safe harbor section 401(k) plan, rather than be designed to satisfy the 
requirements for a SIMPLE 401(k) plan. Accordingly, the number of small 
entities that sponsor section 401(k) plans that are intended to satisfy 
the requirements for a SIMPLE 401(k) plan and are affected by the 
expanded participation requirements of section 112 of the SECURE Act is 
not expected to be substantial.
    For the reasons stated, a regulatory flexibility analysis under the 
Regulatory Flexibility Act is not required. The Treasury Department and 
the IRS invite comments on the impact of this regulation on small 
entities. Pursuant to section 7805(f) of the Code, this notice of 
proposed rulemaking has been submitted to the Chief Counsel of Advocacy 
of the Small Business Administration for comment on its impact on small 
business.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. The proposed regulation does not propose any rule that would 
include any Federal mandate that may result in expenditures by State, 
local, or Tribal governments, or by the private sector in excess of 
that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. The proposed regulation does not 
propose any rule that would have federalism implications, impose 
substantial direct compliance costs on State and local governments, or 
preempt State law within the meaning of the Executive order.

Comments and Public Hearing

    Before a final regulation is adopted with respect to long-term, 
part-time employee rules for cash or deferred arrangements under Sec.  
1.401(k)-5, consideration will be given to comments regarding the 
notice of proposed rulemaking that are submitted timely to the IRS as 
prescribed in the preamble under the ADDRESSES section. The Treasury 
Department and the IRS request comments on all aspects of the proposed 
regulation. As described in section I.B.1 of the Explanation of 
Provisions, comments specifically are requested on the application of 
section 112 of the SECURE Act to a qualified CODA that is included in 
either (1) a governmental plan, or (2) a church plan with respect to 
which the election provided by section 410(d) has not been made.
    All comments will be made available at www.regulations.gov or upon 
request. Once submitted to the Federal eRulemaking Portal, comments 
cannot be edited or withdrawn.
    A public hearing has been scheduled for March 15, 2024, beginning 
at 10:00 a.m. ET in the Auditorium of the Internal Revenue Building, 
1111 Constitution Avenue NW, Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. Participants may alternatively attend the public 
hearing by telephone.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit an outline of the topics to 
be addressed and the time to be devoted to each topic by January 26, 
2024 as prescribed in the preamble under the ADDRESSES section. A 
period of 10 minutes will be allocated to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing. If no 
outline of the topics to be discussed at the hearing is received by 
January 26, 2024, the public hearing will be cancelled. If the public 
hearing is cancelled, a notice of cancellation of the public hearing 
will be published in the Federal Register.
    Individuals who want to testify in person at the public hearing 
must send an email to [email protected] to have your name added to 
the building access list. The subject line of the email must contain 
the regulation number REG-104194-23 and the language TESTIFY In Person. 
For example, the subject line may say: Request to TESTIFY In Person at 
Hearing for REG-104194-23.
    Individuals who want to testify by telephone at the public hearing 
must send an email to [email protected] to receive the telephone 
number and access code for the hearing. The subject line of the email 
must contain the regulation number REG-104194-23 and the language 
TESTIFY Telephonically. For example, the subject line may say: Request 
to TESTIFY Telephonically at Hearing for REG-104194-23.
    Individuals who want to attend the public hearing in person without 
testifying must also send an email to [email protected] to have 
your name added to the building access list. The subject line of the 
email must contain the regulation number REG-104194-23 and the language 
ATTEND In Person. For example, the subject line may say: Request to 
ATTEND Hearing In Person for REG-104194-23. Requests to attend the 
public hearing must be received by 5:00 p.m. ET on March 13, 2024.
    Individuals who want to attend the public hearing by telephone 
without testifying must also send an email to [email protected] to 
receive the telephone number and access code for the hearing. The 
subject line of the email must contain the regulation number REG-
104194-23 and the language ATTEND Hearing Telephonically. For example, 
the subject line may say: Request to ATTEND Hearing Telephonically for

[[Page 82809]]

REG-104194-23. Requests to attend the public hearing must be received 
by 5:00 p.m. ET on March 13, 2024.
    Hearings will be made accessible to people with disabilities. To 
request special assistance during the hearing, please contact the 
Publications and Regulations Branch of the Office of Associate Chief 
Counsel (Procedure and Administration) by sending an email to 
[email protected] (preferred) or by telephone at (202) 317-6901 
(not a toll-free number) by March 12, 2024.

Drafting Information

    The principal authors of this regulation are Kara M. Soderstrom and 
Jason E. Levine, Office of Associate Chief Counsel (Employee Benefits, 
Exempt Organizations, and Employment Taxes (EEE)). However, other 
personnel from the IRS and the Treasury Department participated in the 
development of this regulation.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry for Sec.  1.401(k)-5 in numerical order to read in part as 
follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.401(k)-5 is also issued under 26 U.S.C. 401(m)(9).
* * * * *
0
Par. 2. Section 1.401(k)-5 is revised to read as follows:


Sec.  1.401(k)-5  Long-term, part-time employees.

    (a) Overview--(1) Rules applicable to long-term, part-time 
employees--(i) In general. This section provides rules regarding long-
term, part-time employees, as defined in paragraph (b)(1) of this 
section. A cash or deferred arrangement satisfies the requirements of 
section 401(k)(2)(D) of the Internal Revenue Code only if, with respect 
to each long-term, part-time employee--
    (A) The employee becomes eligible to make a cash or deferred 
election under the arrangement in accordance with the participation 
requirements of paragraph (c) of this section; and
    (B) The plan that includes the arrangement satisfies the vesting 
requirements of paragraph (d) of this section.
    (ii) Optional provisions. A plan that includes a cash or deferred 
arrangement that satisfies the requirements of paragraphs (c) and (d) 
of this section may reflect the nonelective and matching contribution 
provisions of paragraph (e) of this section with respect to long-term, 
part-time employees (but not former long-term, part-time employees as 
defined in paragraph (d)(2)(i) of this section). In addition, an 
employer maintaining the plan may apply the employer election 
provisions of paragraph (f) of this section with respect to long-term, 
part-time employees (but not former long-term, part-time employees).
    (2) Rules applicable to former long-term, part-time employees. See 
paragraph (d)(2) of this section for rules relating to former long-
term, part-time employees.
    (b) Long-term, part-time employees--(1) Definition--(i) In general. 
Except as provided in paragraph (b)(1)(ii) or (iii) of this section, 
long-term, part-time employee means an employee who is eligible to 
participate in the arrangement solely by reason of having--
    (A) Completed two consecutive 12-month periods during each of which 
the employee is credited with at least 500 hours of service (as defined 
in section 410(a)(3)(C)); and
    (B) Attained the age specified in section 410(a)(1)(A)(i) by the 
close of the last of the 12-month periods described in paragraph 
(b)(1)(i)(A) of this section.
    (ii) Exclusion for certain employees. Long-term, part-time 
employees do not include--
    (A) Employees who are included in a unit of employees covered by an 
agreement that the Secretary of Labor finds to be a collective 
bargaining agreement between employee representatives and one or more 
employers if there is evidence that retirement benefits were the 
subject of good faith bargaining between those employee representatives 
and that employer or employers;
    (B) Employees who are nonresident aliens and who receive no earned 
income (within the meaning of section 911(d)(2)) from the employer that 
constitutes income from sources within the United States (within the 
meaning of section 861(a)(3)); or
    (C) Any other employees described in section 410(b)(3).
    (iii) Plan years beginning in 2024. With respect to a plan year 
beginning in 2024, paragraph (b)(1)(i)(A) of this section is applied by 
substituting three consecutive 12-month periods for two consecutive 12-
month periods.
    (2) Examples. The following examples illustrate the application of 
the definition of long-term, part-time employee under paragraph (b)(1) 
of this section, taking into account the determination of 12-month 
periods under paragraph (c)(2)(i) of this section. For purposes of the 
examples, each plan is maintained on a calendar-year basis, includes a 
cash or deferred arrangement, and each plan's provisions are effective 
as of January 1, 2024. For purposes of paragraphs (b)(2)(vi) through 
(xii) of this section (Examples 6 through 12), each plan provides that, 
in order to be eligible to make a cash or deferred election under the 
arrangement, an employee is required to complete a period of service 
with the employer maintaining the plan that extends until the close of 
the earlier of: a 12-month period during which the employee is credited 
with at least 1,000 hours of service, or three consecutive 12-month 
periods (excluding any 12-month period beginning before January 1, 
2021) during each of which the employee is credited with at least 500 
hours of service (however, effective January 1, 2025, each plan is 
amended to provide that the applicable number of consecutive 12-month 
periods during each of which an employee must be credited with at least 
500 hours of service in order to participate in the arrangement is 
reduced from three to two). In addition, for purposes of paragraphs 
(b)(2)(vi) through (xii) of this section (Examples 6 through 12), each 
plan provides that, for purposes of determining whether an employee has 
satisfied the requirements of paragraph (b)(1)(i) of this section, 12-
month periods are determined by reference to the employment 
commencement date of an employee, and each plan provides monthly entry 
dates for an eligible employee to commence participation in the 
arrangement. Except as provided in paragraphs (b)(2)(viii), (ix), and 
(x) of this section (Examples 8, 9, and 10), each employee has attained 
age 21. Except as provided in paragraphs (b)(2)(xi) and (xii) of this 
section (Examples 11 and 12), none of the employees are described in 
section 410(b)(3).
    (i) Example 1. (A) Employer A maintains Plan I. Plan I includes a 
cash or deferred arrangement under which each employee of Employer A is 
eligible to make a cash or deferred election as soon as 
administratively practicable after the employee's employment 
commencement date.
    (B) None of the employees who are eligible to make a cash or 
deferred election under the arrangement in Plan I are long-term, part-
time employees

[[Page 82810]]

because none of those employees are eligible to participate in the 
arrangement solely by reason of having completed the number of 
consecutive 12-month periods that applies under paragraph (b)(1)(i)(A) 
or (b)(1)(iii) of this section (referred to as the applicable number of 
consecutive 12-month periods) during each of which the employee is 
credited with at least 500 hours of service.
    (ii) Example 2. (A) Employer B maintains Plan J. Plan J provides 
that, in order to be eligible to make a cash or deferred election under 
the arrangement, each employee of Employer B is required to complete a 
12-month period of service with Employer B during which the employee is 
credited with at least 500 hours of service.
    (B) None of the employees who are eligible to make a cash or 
deferred election under the arrangement in Plan J are long-term, part-
time employees because none of those employees are eligible to 
participate in the arrangement solely by reason of having completed the 
applicable number of consecutive 12-month periods during each of which 
the employee is credited with at least 500 hours of service.
    (iii) Example 3. (A) Employer C maintains Plan K. Plan K provides 
that, in order to be eligible to make a cash or deferred election under 
the arrangement, each employee of Employer C is required to complete a 
period of service with Employer C that extends until the close of the 
earlier of: a 12-month period during which the employee is credited 
with at least 1,000 hours of service, or two consecutive 12-month 
periods during each of which the employee is credited with at least 500 
hours of service.
    (B) For the plan year beginning January 1, 2024, none of the 
employees who are eligible to make a cash or deferred election under 
the arrangement in Plan K are long-term, part-time employees because 
none of those employees are eligible to participate in the arrangement 
solely by reason of having completed three consecutive 12-month periods 
during each of which the employee is credited with at least 500 hours 
of service.
    (C) For plan years beginning on or after January 1, 2025, an 
employee who becomes eligible to participate in the arrangement in Plan 
K solely by reason of having completed two consecutive 12-month periods 
during each of which the employee is credited with at least 500 hours 
of service would be a long-term, part-time employee. However, an 
employee who became eligible to participate in the arrangement before 
January 1, 2025, would not be a long-term, part-time employee for plan 
years beginning on or after January 1, 2025, because that employee did 
not become eligible to participate in the arrangement solely by reason 
of completing the applicable number of consecutive 12-month periods 
during each of which the employee is credited with at least 500 hours 
of service.
    (iv) Example 4. (A) Employer D maintains Plan L. Plan L provides 
that, in order to be eligible to make a cash or deferred election under 
the arrangement, each employee of Employer D is required to complete a 
1-year period of service with Employer D using the elapsed time method 
of crediting service.
    (B) None of the employees who are eligible to make a cash or 
deferred election under the arrangement in Plan L are long-term, part-
time employees because none of those employees are eligible to 
participate in the arrangement solely by reason of having completed the 
applicable number of consecutive 12-month periods during each of which 
the employee is credited with at least 500 hours of service.
    (v) Example 5. (A) The facts are the same as in paragraph 
(b)(2)(iv)(A) of this section (Example 4), except that Plan L requires 
employees of Employer D who are classified as part-time employees to 
complete the applicable number of consecutive 1-year periods of service 
under paragraph (b)(1)(i)(A) or (b)(1)(iii) of this section with 
Employer D using the elapsed time method of crediting service.
    (B) Plan L fails to satisfy the requirements of section 
401(k)(2)(D)(i) because, under the elapsed time method of crediting 
service, a 1-year period of service is the maximum period that Plan L 
may require any employee to complete in order to participate in the 
arrangement.
    (vi) Example 6. (A) Employer E maintains Plan M. For purposes of 
determining the eligibility of an employee to participate in the 
arrangement under Plan M, Plan M credits an employee with 190 hours of 
service for each month for which the employee would be required to be 
credited with at least 1 hour of service. Employees R and S are 
employees of Employer E who both have an employment commencement date 
of June 1, 2024. Employees R and S are both classified by Employer E as 
part-time employees. During the 12-month period beginning on June 1, 
2024, Employee R has at least 1 hour of service each month for 6 months 
and, therefore, is credited with 1,140 hours of service. Employee R 
commences participation in the arrangement in Plan M on June 1, 2025. 
During each of the 12-month periods beginning on June 1, 2024, and June 
1, 2025, Employee S is credited with at least 1 hour of service each 
month for 4 months and, therefore, is credited with 760 hours of 
service for the period. Employee S commences participation in the 
arrangement in Plan M on June 1, 2026.
    (B) Employee R is not a long-term, part-time employee (or former 
long-term, part-time employee, as defined in paragraph (d)(2)(i) of 
this section) because Employee R is credited with 1,140 hours of 
service during the 12-month period beginning on June 1, 2024. 
Therefore, Employee R is not eligible to participate in the arrangement 
solely by reason of having completed the applicable number of 
consecutive 12-month periods during each of which the employee is 
credited with at least 500 hours of service. However, Employee S is 
eligible to participate in the arrangement solely by reason of having 
completed the applicable number of consecutive 12-month periods during 
each of which the employee is credited with at least 500 hours of 
service. Accordingly, Employee S is a long-term, part-time employee.
    (vii) Example 7. (A) Employer G maintains Plan O. Employee U is an 
employee of Employer G with an employment commencement date of June 1, 
2024. Employee U is classified by Employer G as a part-time employee. 
During the 12-month period beginning on June 1, 2024, Employee U is 
credited with 900 hours of service. During the 12-month period 
beginning on June 1, 2025, Employee U is credited with 1,100 hours of 
service. Employee U commences participation in the arrangement in Plan 
O on June 1, 2026. During the 12-month period beginning on June 1, 
2026, Employee U is credited with 900 hours of service.
    (B) Employee U is not a long-term, part-time employee (or former 
long-term, part-time employee) because Employee U is credited with 
1,100 hours of service during the 12-month period beginning on June 1, 
2025. Therefore, Employee U is not eligible to participate in the 
arrangement solely by reason of having completed the applicable number 
of consecutive 12-month periods during each of which the employee is 
credited with at least 500 hours of service. The result would be the 
same even if Employee U also is credited with at least 500 (but less 
than 1,000) hours of service during the plan year beginning on June 1, 
2027 (and therefore completes two consecutive 12-month periods during 
each of which the

[[Page 82811]]

employee is credited with at least 500 hours of service).
    (viii) Example 8. (A) Employer H maintains Plan P. Plan P excludes 
any employees who have not yet attained age 21 from participating in 
the arrangement under Plan P. Employee V is an employee of Employer H 
with an employment commencement date of June 1, 2024, who attains age 
18 on September 2, 2024. During the 12-month period beginning on June 
1, 2024, Employee V is credited with 1,100 hours of service. During 
each of the 12-month periods beginning on June 1, 2025, and June 1, 
2026, Employee V is credited with 600 hours of service. On September 2, 
2027, Employee V attains age 21 and Employee V commences participation 
in the arrangement in Plan P on October 1, 2027.
    (B) Employee V is not a long-term, part-time employee (or former 
long-term, part-time employee) because Employee V was credited with 
1,100 hours of service during the 12-month period beginning on June 1, 
2024, and, therefore, became eligible to participate in the arrangement 
by reason of completing a 12-month period with at least 1,000 hours of 
service and attaining age 21. Accordingly, Employee V did not become 
eligible to participate in the arrangement solely by reason of having 
completed the applicable number of consecutive 12-month periods during 
each of which the employee is credited with at least 500 hours of 
service.
    (ix) Example 9. (A) Employer I maintains Plan Q. Plan Q excludes 
any employees who have not yet attained age 21 from participating in 
the arrangement under Plan Q. Employee W is an employee of Employer I 
with an employment commencement date of June 1, 2024, who attains age 
19 on October 3, 2024. During each of the 12-month periods beginning on 
June 1, 2024, and June 1, 2025, Employee W is credited with 600 hours 
of service for the period. During the 12-month period beginning on June 
1, 2026, Employee W attains age 21 (on October 3, 2026), but is 
credited with only 400 hours of service.
    (B) Employee W is not a long-term, part-time employee (or former 
long-term, part-time employee) because Employee W is credited with only 
400 hours of service during the 12-month period in which Employee W 
attains age 21. Therefore, Employee W did not attain age 21 by the 
close of the last of the 12-month periods described in paragraph 
(b)(1)(i)(A) of this section. However, Employee W could become eligible 
to participate in the arrangement in Plan Q as a long-term, part-time 
employee as of June 1, 2029, if Employee W is credited with at least 
500 (but less than 1,000) hours of service for each 12-month period 
beginning on June 1, 2027, and June 1, 2028.
    (x) Example 10. (A) The facts are the same as in paragraph 
(b)(2)(ix)(A) of this section (Example 9), except that, during the 12-
month period beginning on June 1, 2026, Employee W is credited with 600 
hours of service, and Employee W commences participation in the 
arrangement in Plan Q on June 1, 2027.
    (B) Employee W is credited with 600 hours of service for each 12-
month period beginning on June 1, 2025, and June 1, 2026, and attains 
age 21 on October 3, 2026, which is by the close of the last of those 
12-month periods. Accordingly, Employee W is a long-term, part-time 
employee.
    (xi) Example 11. (A) Employer J maintains Plan R. Plan R excludes 
any employees who are included in a unit of employees covered by a 
collective bargaining agreement described in paragraph (b)(1)(ii)(A) of 
this section from participating in the arrangement under Plan R. 
Employee X is an employee of Employer J who is included in a unit of 
employees covered by a collective bargaining agreement described in 
paragraph (b)(1)(ii)(A) of this section, and who has an employment 
commencement date of June 1, 2024. During each of the 12-month periods 
beginning on June 1, 2024, and June 1, 2025, Employee X is credited 
with 600 hours of service for the period. During the 12-month period 
beginning on June 1, 2026, Employee X is credited with 1,100 hours of 
service. On June 2, 2027, Employee X ceases to be included in a unit of 
employees covered by a collective bargaining agreement described in 
paragraph (b)(1)(ii)(A) of this section and becomes eligible to 
participate in the arrangement.
    (B) Employee X is not a long-term, part-time employee (or former 
long-term, part-time employee) because Employee X is credited with 
1,100 hours of service during the 12-month period beginning on June 1, 
2026. Therefore, Employee X is not eligible to participate in the 
arrangement solely by reason of having completed the applicable number 
of consecutive 12-month periods during each of which the employee is 
credited with at least 500 hours of service.
    (xii) Example 12. (A) The facts are the same as in paragraph 
(b)(2)(xi)(A) of this section (Example 11), except that, during the 12-
month period beginning on June 1, 2026, Employee X is credited with 
only 600 hours of service.
    (B) Employee X is eligible to participate in the arrangement solely 
by reason of having completed the applicable number of consecutive 12-
month periods during each of which the employee is credited with at 
least 500 hours of service. Accordingly, Employee X is a long-term, 
part-time employee.
    (c) Participation--(1) Time of participation--(i) In general. 
Subject to the rules of this paragraph (c)(1) and paragraph (c)(4) of 
this section, a long-term, part-time employee who satisfies the plan's 
eligibility conditions (as described in paragraph (c)(3) of this 
section) must become eligible to make a cash or deferred election under 
the arrangement no later than the earlier of--
    (A) The first day of the first plan year beginning after the date 
on which the long-term, part-time employee satisfied the requirements 
of paragraphs (b)(1)(i)(A) and (B) of this section; or
    (B) The date 6 months after the date on which the long-term, part-
time employee satisfied the requirements of paragraphs (b)(1)(i)(A) and 
(B) of this section.
    (ii) Employees who separate from service. The requirements of 
paragraph (c)(1)(i) of this section do not apply to a long-term, part-
time employee who separates from service and does not return to service 
with the employer or employers maintaining the plan before the date 
referred to in paragraph (c)(1)(i) of this section. However, if a long-
term, part-time employee described in the prior sentence returns to 
service with the employer or employers maintaining the plan after the 
date referred to in paragraph (c)(1)(i) of this section and is 
otherwise eligible to participate in the arrangement, the long-term, 
part-time employee must be eligible to make a cash or deferred election 
immediately upon return to service with the employer or employers 
maintaining the plan.
    (iii) Change in status. If an employee who would otherwise be 
eligible to participate in the arrangement as a long-term, part-time 
employee does not participate solely because the employee does not 
satisfy the plan's eligibility conditions (as described in paragraph 
(c)(3) of this section) as of the date referred to in paragraph 
(c)(1)(i) of this section, and the employee satisfies those conditions 
after that date, the employee must become eligible to participate in 
the arrangement immediately upon satisfying those conditions.
    (2) Determination of 12-month periods--(i) In general. Except for 
any 12-month period beginning before January 1, 2021, all 12-month 
periods during which an employee is credited

[[Page 82812]]

with at least 500 hours of service with the employer or employers 
maintaining the plan must be taken into account for purposes of 
determining whether an employee has satisfied the requirements of 
paragraphs (b)(1)(i)(A) and (B) of this section.
    (ii) Initial and subsequent 12-month periods. (A) The initial 12-
month period with respect to an employee begins on the first day for 
which the employee is entitled to be credited with an hour of service.
    (B) Beginning with the plan year that commences within the initial 
12-month period described in paragraph (c)(2)(ii)(A) of this section, 
12-month periods may be determined by reference to the first day of the 
plan year. If the preceding sentence applies, that initial 12-month 
period and the plan year that commences within the initial 12-month 
period are treated as consecutive 12-month periods.
    (iii) Examples. The following examples illustrate the determination 
of 12-month periods under this paragraph (c)(2). For purposes of the 
examples, each plan includes a cash or deferred arrangement, is 
maintained on a calendar-year basis, and provides monthly entry dates 
for an eligible employee to commence participation in the arrangement. 
Each employee in the following examples has attained age 21, and none 
of the employees are described in section 410(b)(3). For purposes of 
paragraphs (c)(2)(iii)(A), (B), and (G) of this section (Examples 1, 2, 
and 7), each plan provides that, for purposes of determining whether an 
employee has satisfied the requirements of paragraphs (b)(1)(i)(A) and 
(B) of this section, 12-month periods are determined by reference to 
the employment commencement date of an employee. For purposes of 
paragraphs (c)(2)(iii)(C) through (F) of this section (Examples 3 
through 6), each plan provides that, for purposes of determining 
whether an employee has satisfied the requirements of paragraphs 
(b)(1)(i)(A) and (B) of this section, any 12-month period that begins 
after the first day of the initial 12-month period is determined by 
reference to the first day of the plan year. For purposes of paragraph 
(c)(2)(iii)(A) of this section and paragraphs (c)(2)(iii)(C) through 
(G) of this section (Example 1 and Examples 3 through 7), each plan 
provides that, effective January 1, 2024, in order to be eligible to 
make a cash or deferred election under the arrangement, each employee 
is required to complete a period of service with the employer 
maintaining the plan that extends until the close of the earlier of: a 
12-month period during which the employee is credited with at least 
1,000 hours of service, or three consecutive 12-month periods 
(excluding any 12-month period beginning before January 1, 2021) during 
each of which the employee is credited with at least 500 hours of 
service. However, effective January 1, 2025, each plan is amended to 
provide that the applicable number of consecutive 12-month periods 
during each of which an employee must be credited with at least 500 
hours of service in order to participate in the arrangement is reduced 
from three to two.
    (A) Example 1. (1) Employer K maintains Plan S. Pursuant to 
paragraph (c)(2)(i) of this section, Plan S provides that any 12-month 
period beginning before January 1, 2021, is not taken into account for 
purposes of determining whether an employee has completed three 
consecutive 12-month periods during each of which the employee is 
credited with at least 500 hours of service. Employee Y is an employee 
of Employer K with an employment commencement date of June 1, 2021. 
During each of the 12-month periods beginning on June 1, 2021, June 1, 
2022, and June 1, 2023, Employee Y is credited with 600 hours of 
service for the period. Employee Y commences participation in the 
arrangement in Plan S on June 1, 2024.
    (2) Employee Y is eligible to participate in the arrangement solely 
by reason of having completed three consecutive 12-month periods during 
each of which the employee is credited with at least 500 hours of 
service, and Employee Y is a long-term, part-time employee. If Employee 
Y had an employment commencement date of June 1, 2020, and had been 
credited with 600 hours of service for the 12-month period beginning on 
June 1, 2020, then the result would be the same because, under the 
terms of the plan, the 12-month period beginning on June 1, 2020, would 
not be taken into account for purposes of determining whether Employee 
Y has completed three consecutive 12-month periods during each of which 
the employee is credited with at least 500 hours of service and, 
therefore, Employee Y would become eligible to participate in the 
arrangement on June 1, 2024, as a long-term, part-time employee.
    (B) Example 2. (1) Employer L maintains Plan T. Plan T provides 
that, in order to be eligible to make a cash or deferred election under 
the arrangement, each employee is required to complete a period of 
service with Employer L that extends until the close of the earlier of: 
a 12-month period during which the employee is credited with at least 
1,000 hours of service; or the number of consecutive 12-month periods 
that applies under paragraph (b)(1)(i)(A) or (b)(1)(iii) of this 
section (referred to as the applicable number of consecutive 12-month 
periods), including 12-month periods beginning before January 1, 2021. 
Employee Z is an employee of Employer L with an employment commencement 
date of June 1, 2020. During each of the 12-month periods beginning on 
June 1, 2020, June 1, 2021, and June 1, 2022, Employee Z is credited 
with 600 hours of service for the period. Employee Z commences 
participation in the arrangement in Plan T on June 1, 2023.
    (2) Plan T does not fail to satisfy the requirements of section 
401(k)(2)(D) merely because, under the terms of Plan T, Employee Z 
commences participation in the arrangement on June 1, 2023. However, 
paragraph (c)(2)(i) of this section does not permit any 12-month period 
beginning before January 1, 2021 (including the 12-month period 
beginning on June 1, 2020), to be taken into account for purposes of 
determining whether an employee has completed the applicable number of 
consecutive 12-month periods during each of which the employee is 
credited with at least 500 hours of service. Accordingly, Employee Z is 
not a long-term, part-time employee because Employee Z is not eligible 
to participate in the arrangement solely by reason of having completed 
the applicable number of consecutive 12-month periods (beginning on or 
after January 1, 2021) during each of which the employee is credited 
with at least 500 hours of service.
    (C) Example 3. (1) Employer M maintains Plan U. Employee A is an 
employee of Employer M with an employment commencement date of March 1, 
2023. During the 12-month period beginning on March 1, 2023, Employee A 
is credited with 400 hours of service. During each of the 12-month 
periods beginning on January 1, 2024, and January 1, 2025, Employee A 
is credited with 600 hours of service for the period. Employee A 
commences participation in the arrangement under Plan U on January 1, 
2026.
    (2) Plan U satisfies the requirements of paragraph (c)(2)(ii)(B) of 
this section with respect to Employee A. The fact that the 12-month 
period beginning March 1, 2023, is not a 12-month period for which 
Employee A is credited with at least 500 hours of service, does not 
prevent Employee A from being a long-term, part-time employee. 
Accordingly, Employee A is eligible to participate in the arrangement 
on January 1, 2026, solely by reason of having completed

[[Page 82813]]

two consecutive 12-month periods during each of which the employee is 
credited with at least 500 hours of service (that is, the 12-month 
periods beginning on January 1, 2024, and January 1, 2025), and 
Employee A is a long-term, part-time employee.
    (D) Example 4. (1) Employer N maintains Plan V. Employee B is an 
employee of Employer N with an employment commencement date of December 
1, 2023. During the 12-month period beginning on December 1, 2023, 
Employee B is credited with 600 hours of service. During the 12-month 
period beginning on January 1, 2024, Employee B is credited with 600 
hours of service. Employee B commences participation in the arrangement 
under Plan V on January 1, 2025.
    (2) Plan V satisfies the requirements of paragraph (c)(2)(ii)(B) of 
this section with respect to Employee B because the 12-month periods 
beginning on December 1, 2023, and January 1, 2024, are considered two 
consecutive 12-month periods. Accordingly, Employee B is eligible to 
participate in the arrangement on January 1, 2025, solely by reason of 
having completed two consecutive 12-month periods during each of which 
the employee is credited with at least 500 hours of service, and 
Employee B is a long-term, part-time employee.
    (E) Example 5. (1) Employer O maintains Plan W. Employee C is an 
employee of Employer O with an employment commencement date of August 
1, 2020. During the 12-month period beginning on August 1, 2020, 
Employee C is credited with 600 hours of service. During each of the 
12-month periods beginning on January 1, 2021, January 1, 2022, and 
January 1, 2023, Employee C is credited with 600 hours of service for 
the period. Employee C commences participation in the arrangement in 
Plan W on January 1, 2024.
    (2) Plan W satisfies the requirements of paragraph (c)(2)(ii)(B) of 
this section with respect to Employee C. Pursuant to paragraph 
(c)(2)(i) of this section, Plan W does not take into account the 12-
month beginning on August 1, 2020, for purposes of determining whether 
Employee C has completed three consecutive 12-month periods during each 
of which the employee is credited with at least 500 hours of service. 
Accordingly, Employee C is eligible to participate in the arrangement 
on January 1, 2024, solely by reason of having completed three 
consecutive 12-month periods during each of which the employee is 
credited with at least 500 hours of service (that is, the 12-month 
periods beginning on January 1, 2021, January 1, 2022, and January 1, 
2023), and Employee C is a long-term, part-time employee.
    (F) Example 6. (1) Employer P maintains Plan X. Employee D is an 
employee of Employer P with an employment commencement date of March 1, 
2023. During the 12-month period beginning on March 1, 2023, Employee D 
is credited with 600 hours of service. During the 12-month period 
beginning on January 1, 2024, Employee D is credited with 400 hours of 
service. During each of the 12-month periods beginning on January 1, 
2025, and January 1, 2026, Employee D is credited with 600 hours of 
service for the period. Employee D commences participation in the 
arrangement under Plan X on January 1, 2027.
    (2) Plan X satisfies the requirements of paragraph (c)(2)(ii)(B) of 
this section with respect to Employee D. The 12-month period beginning 
on March 1, 2023 (for which Employee D is credited with 600 hours of 
service) is not taken into account for purposes of determining whether 
Employee D has completed the applicable number of consecutive 12-month 
periods during each of which the employee is credited with at least 500 
hours of service because Employee D is not credited with at least 500 
hours of service during the 12-month period beginning on January 1, 
2024. Accordingly, Employee D is eligible to participate in the 
arrangement on January 1, 2027, solely by reason of having completed 
two consecutive 12-month periods during each of which the employee is 
credited with at least 500 hours of service (that is, the 12-month 
periods beginning on January 1, 2025, and January 1, 2026), and 
Employee D is a long-term, part-time employee.
    (G) Example 7. (1) Employer Q maintains Plan Y. Employee E is an 
employee of Employer Q with an employment commencement date of June 1, 
2023. During each of the 12-month periods beginning on June 1, 2023, 
and June 1, 2024, Employee E is credited with 600 hours of service for 
the period. Employee E commences participation in the arrangement in 
Plan Y on June 1, 2025. During the 12-month period beginning on June 1, 
2025, Employee E is credited with 300 hours of service.
    (2) Pursuant to paragraph (c)(2)(i) of this section, the 12-month 
periods beginning on June 1, 2023, and June 1, 2024, must be taken into 
account for purposes of determining whether Employee E is a long-term, 
part-time employee. This requirement is not changed merely because 
Employee E is not credited with at least 500 hours of service during 
the 12-month period beginning on June 1, 2025. Accordingly, Employee E 
does not cease to be a long-term, part-time employee merely because 
Employee E completes a 12-month period during which Employee E is 
credited with less than 500 hours of service.
    (3) Eligibility conditions not based on age or service--(i) In 
general. Subject to paragraph (c)(3)(ii) of this section, the rules of 
this section do not preclude a plan from establishing an eligibility 
condition that must be satisfied in order for an employee to 
participate in the arrangement (for example, requiring as a condition 
of participation that an employee be employed within a specified job 
classification), provided that the condition is not a proxy for 
imposing an age or service requirement that requires an employee to 
complete a period of service with the employer or employers maintaining 
the plan that extends beyond the close of the earlier of the periods 
described in section 401(k)(2)(D)(i) and (ii).
    (ii) Eligibility conditions that are proxies for age or service. 
For purposes of applying the rules of this section, a plan provision 
will be treated as a proxy for imposing an age or service requirement 
if the provision has the effect of imposing an age or service 
requirement with the employer or employers maintaining the plan.
    (iii) Examples. The following examples illustrate the rules of this 
paragraph (c)(3). For purposes of the examples, each plan includes a 
cash or deferred arrangement and is maintained on a calendar-year 
basis.
    (A) Example 1. (1) Employer R maintains Plans Z and A. Effective 
January 1, 2024, Plan Z provides that, as a condition to participate in 
the arrangement, an employee must complete the number of consecutive 
12-month periods that applies under paragraph (b)(1)(i)(A) or 
(b)(1)(iii) of this section (referred to as the applicable number of 
consecutive 12-month periods) during each of which the employee is 
credited with at least 500 hours of service. Effective January 1, 2024, 
Plan A provides that, as a condition to participate in the arrangement, 
an employee must complete a 12-month period during which the employee 
is credited with at least 1,000 hours of service.
    (2) Because the provision of Plan Z that requires an employee to 
complete the applicable number of consecutive 12-month periods during 
each of which the employee is credited with at least 500 hours of 
service in order to participate in the arrangement requires an employee 
to complete the period of

[[Page 82814]]

service described in section 401(k)(2)(D)(ii), that provision requires 
an employee to complete a period of service with Employer R that 
extends beyond the close of the earlier of the period described in 
section 401(k)(2)(D)(i), or the period described in section 
401(k)(2)(D)(ii). Accordingly, as of January 1, 2024, the arrangement 
under Plan Z fails to satisfy the requirements of section 401(k)(2)(D). 
Similarly, because Plan A requires an employee to complete a 12-month 
period during which the employee is credited with at least 1,000 hours 
of service in order to participate in the arrangement, as of January 1, 
2024, the arrangement under Plan A fails to satisfy the requirements of 
section 401(k)(2)(D).
    (B) Example 2. (1) Employer S maintains Plan B. Employer S is 
comprised of Divisions T and U. In order to be employed in Division T, 
an employee is required to be classified as a full-time employee, which 
Employer S defines as an employee who completes a 12-month period 
during which the employee is credited with at least 1,000 hours of 
service. All other employees of Employer S are employed in Division U. 
Effective January 1, 2024, Plan B provides that, as a condition to 
participate in the arrangement, an employee is required to be employed 
in Division T.
    (2) Because the provision of Plan B that requires an employee to be 
employed in Division T in order to participate in the arrangement has 
the effect of requiring an employee to complete the period of service 
described in section 401(k)(2)(D)(i), that provision is treated as a 
service requirement under paragraph (c)(3)(ii) of this section. 
Accordingly, as of January 1, 2024, the arrangement under Plan B fails 
to satisfy the requirements of section 401(k)(2)(D) because the 
arrangement requires an employee to complete a period of service with 
Employer S that extends beyond the close of the earlier of: the period 
described in section 401(k)(2)(D)(i), or the period described in 
section 401(k)(2)(D)(ii).
    (C) Example 3. (1) Employer V maintains Plan C. Prior to January 1, 
2024, Plan C provided that an employee classified by Employer V as a 
part-time employee was ineligible to make a cash or deferred election 
under the arrangement unless the part-time employee completed a 12-
month period during which the employee was credited with at least 1,000 
hours of service with Employer V. Effective January 1, 2024, Plan C 
provides that an employee classified by Employer V as a part-time 
employee is ineligible to make a cash or deferred election under the 
arrangement unless the employee completes a period of service with 
Employer V that extends until the close of the earlier of: a 12-month 
period during which the employee is credited with at least 1,000 hours 
of service, or the applicable number of consecutive 12-month periods 
during each of which the employee is credited with at least 500 hours 
of service (excluding any 12-month period beginning before January 1, 
2021).
    (2) Plan C does not fail to satisfy the requirements of section 
401(k)(2)(D) merely because, effective January 1, 2024, Plan C provides 
that an employee classified as a part-time employee is ineligible to 
make a cash or deferred election under the arrangement unless the 
employee completes a period of service with Employer V that extends 
until the close of the earlier of: a 12-month period during which the 
employee is credited with at least 1,000 hours of service, or the 
applicable number of consecutive 12-month periods during each of which 
the employee is credited with at least 500 hours of service (excluding 
any 12-month period beginning before January 1, 2021).
    (4) Elective contributions. A cash or deferred arrangement 
satisfies the requirements of this paragraph (c)(4) only if the right 
to make elective contributions by a long-term, part-time employee who 
is an eligible NHCE is not restricted in a manner that would not be 
permitted for an NHCE under Sec.  1.401(k)-3(c)(6). However, a SIMPLE 
401(k) plan may limit the amount of elective contributions made by 
long-term, part-time employees under the plan to the extent needed to 
satisfy the elective contribution limitation for SIMPLE 401(k) plans 
under section 401(k)(11)(B)(i)(I) and (m)(10)(A).
    (d) Vesting--(1) Years of vesting service taken into account--(i) 
General rule. For purposes of determining the nonforfeitable right of a 
long-term, part-time employee (or former long-term, part-time employee) 
to employer contributions under the plan (other than elective 
contributions)--
    (A) Each 12-month period (which may be any 12-consecutive month 
period that is not prohibited for use under section 411(a)) during 
which the employee is credited with at least 500 hours of service (as 
defined in section 410(a)(3)(C)) with the employer or employers 
maintaining the plan is treated as a year of vesting service; and
    (B) Except for any 12-month period beginning before January 1, 
2021, all 12-month periods of service with the employer or employers 
maintaining the plan must be taken into account unless the period of 
service of the employee may be disregarded under section 411(a).
    (ii) Application of vesting rules. For purposes of this paragraph 
(d), section 411 will be treated as if it applies to the plan, taking 
into account the modifications provided in paragraphs (d)(1)(i) and 
(iii) of this section.
    (iii) Break in service. For purposes of determining whether a long-
term, part-time employee (or former long-term, part-time employee) has 
incurred a 1-year break in service, section 411(a)(6)(A) is applied by 
substituting at least 500 hours of service for more than 500 hours of 
service.
    (2) Former long-term, part-time employees--(i) Definition. A former 
long-term, part-time employee means an employee who--
    (A) Became eligible to participate in the arrangement as a long-
term, part-time employee;
    (B) Subsequently ceased to be a long-term, part-time employee 
because the employee was described in paragraph (d)(2)(ii)(A) or (B) of 
this section; and
    (C) Has not returned to long-term, part-time employee status in 
accordance with paragraph (d)(2)(iii) of this section.
    (ii) Timing. A long-term, part-time employee becomes a former long-
term, part-time employee as of the first day of the first plan year 
beginning after the earlier of the plan year in which the employee:
    (A) Satisfies the requirements of section 401(k)(2)(D) without 
regard to section 401(k)(2)(D)(ii); or
    (B) Ceases to satisfy the plan's eligibility conditions (other than 
age or service conditions).
    (iii) Return to long-term, part-time employee status. If a long-
term, part-time employee who ceases to satisfy the plan's eligibility 
conditions (other than age or service conditions) during a plan year 
subsequently satisfies those conditions, then the employee will return 
to long-term, part-time employee status as of the first day of the plan 
year during which the employee again satisfies those conditions. 
However, the preceding sentence does not apply if the employee is a 
former long-term, part-time employee because the employee satisfies the 
requirements of section 401(k)(2)(D) without regard to section 
401(k)(2)(D)(ii).
    (3) Examples. The following examples illustrate the vesting 
requirements of this paragraph (d). For purposes of the examples, each 
plan includes a cash or deferred arrangement; is maintained on a 
calendar-year basis; provides that, for purposes of determining whether 
an employee has satisfied the requirements

[[Page 82815]]

of paragraph (b)(1)(i) of this section and for purposes of determining 
the nonforfeitable right of a long-term, part-time employee (or former 
long-term, part-time employee) to employer contributions under the plan 
(other than elective contributions), all 12-month periods are 
determined by reference to the employment commencement date of an 
employee; and provides that, for purposes of determining the 
nonforfeitable right of an employee to any nonelective contribution 
made on behalf of the employee, the plan uses a 6-year graded vesting 
schedule.
    (i) Example 1. (A) Employer X maintains Plan G. Employees of 
Employer X are employed at either Plant Y or Plant Z. Plan G requires 
that an employee be employed at Plant Y as a condition to participate 
in the arrangement. This condition is not a proxy for age or service 
under paragraph (c)(3)(ii) of this section. Employee N is an employee 
of Employer X who is employed at Plant Z, and who has an employment 
commencement date of June 1, 2021. During the 12-month periods 
beginning on June 1, 2021, June 1, 2022, June 1, 2023, June 1, 2024, 
June 1, 2025, and June 1, 2026, Employee N is credited with 600 hours 
of service for each period. On June 2, 2027, Employee N is transferred 
to Plant Y, becomes eligible to participate in the arrangement in Plan 
G, and thereafter commences participation in the arrangement as a long-
term, part-time employee.
    (B) Unless Plan G is permitted to disregard years of vesting 
service for Employee N under section 411(a), paragraph (d)(1)(i) of 
this section requires Plan G to credit Employee N with 6 years of 
vesting service for the 12-month periods beginning on June 1, 2021, 
June 1, 2022, June 1, 2023, June 1, 2024, June 1, 2025, and June 1, 
2026, because Employee N is credited with at least 500 hours of service 
during each of those periods. Accordingly, Employee N has a 100-percent 
nonforfeitable right to any nonelective contribution under Plan G that 
is made on behalf of Employee N.
    (ii) Example 2. (A) Employer A maintains Plan H. Employee O 
commences participation in the arrangement in Plan H as a long-term, 
part-time employee on June 1, 2024. During the 12-month period 
beginning on June 1, 2024, Employee O is credited with 1,200 hours of 
service. During each of the 12-month periods beginning on June 1, 2025, 
and June 1, 2026, Employee O is credited with 600 hours of service for 
the period.
    (B) Based on these facts, Employee O remains a long-term, part-time 
employee for the plan year beginning January 1, 2025. Pursuant to 
paragraph (d)(2)(ii) of this section, Employee O becomes a former long-
term, part-time employee beginning with the next plan year. However, 
this paragraph (d) continues to apply to Employee O (although 
paragraphs (e) and (f) of this section no longer apply to Employee O 
beginning with the 2026 plan year). Employee O will not cease to be a 
former long-term, part-time employee merely because Employee O 
completes one or more 12-month periods during each of which the 
employee is credited with at least 500 (but less than 1,000) hours of 
service. Thus, Employee O is credited with a year of vesting service 
for each of the 12-month periods in which Employee O is credited with 
at least 500 hours of service (including the 12-month periods beginning 
on June 1, 2025, and June 1, 2026).
    (iii) Example 3. (A) Employer B maintains Plan J. Employees of 
Employer B are employed at either Plant C or Plant D. Plan J requires, 
as a condition to participate in the arrangement, that an employee be 
employed at Plant C. This condition is not a proxy for age or service 
under paragraph (c)(3)(ii) of this section. Employee P is an NHCE who 
is employed at Plant C, and who has an employment commencement date of 
June 1, 2021. On June 1, 2024, Employee P commences participation in 
the arrangement in Plan J as a long-term, part-time employee. During 
the 12-month periods beginning on June 1, 2024, and June 1, 2025, 
Employee P continues to be credited with at least 500 (but less than 
1,000) hours of service for each period. However, on March 1, 2025, 
Employee P is transferred to Plant D and becomes ineligible to 
participate in the arrangement. On March 1, 2026, Employee P is 
transferred back to Plant C and again becomes eligible to participate 
in the arrangement. Employee P remains employed at Plant C through the 
2026 plan year.
    (B) Based on these facts, Employee P remains a long-term, part-time 
employee for the 2025 plan year (although Employee P may not make a 
cash or deferred election under the arrangement as of March 1, 2025). 
Pursuant to paragraph (d)(2)(iii) of this section, Employee P remains a 
long-term, part-time employee for the 2026 plan year (although Employee 
P is not eligible to make a cash or deferred election under the 
arrangement again until March 1, 2026). As a result, Employee P never 
becomes a former long-term, part-time employee, and this paragraph (d) 
continues to apply to Employee P.
    (e) Nonelective and matching contributions--(1) General rule. 
Notwithstanding section 401(a)(4), neither nonelective nor matching 
contributions are required to be made on behalf of long-term, part-time 
employees, even if those contributions are made on behalf of other 
eligible employees.
    (2) Coordination with employer elections--(i) Safe harbor 
contributions. A plan that is intended to satisfy the ADP safe harbor 
provisions of section 401(k)(12) or (13) will not fail to satisfy those 
provisions merely because the employer does not make a nonelective or 
matching contribution on behalf of an eligible NHCE who is a long-term, 
part-time employee (or makes a nonelective or matching contribution 
that does not satisfy the safe harbor contribution requirements of 
Sec.  1.401(k)-3 on behalf of the eligible NHCE), provided that long-
term, part-time employees are excluded for purposes of determining 
whether the plan satisfies the ADP safe harbor provisions of section 
401(k)(12) or (13) pursuant to the election under paragraph (f)(1) of 
this section. Similarly, a plan that is intended to satisfy the ACP 
safe harbor provisions of section 401(m)(11) or (12) will not fail to 
satisfy those provisions merely because the employer does not make a 
nonelective or matching contribution on behalf of an eligible NHCE who 
is a long-term, part-time employee (or makes a nonelective or matching 
contribution that does not satisfy the safe harbor contribution 
requirements of Sec.  1.401(m)-3 on behalf of the eligible NHCE), 
provided that long-term, part-time employees are excluded for purposes 
of determining whether the plan satisfies the ACP safe harbor 
provisions of section 401(m)(11) or (12) pursuant to the election under 
paragraph (f)(1) of this section.
    (ii) Top-heavy minimum benefits. A plan that is a top-heavy plan 
for the plan year will not fail to satisfy the minimum benefit 
requirements of section 416(c) merely because the employer contribution 
(if any) made for the plan year on behalf of a non-key employee who is 
a long-term, part-time employee does not satisfy those requirements, 
provided that long-term, part-time employees are excluded for purposes 
of determining whether the plan satisfies the minimum benefit 
requirements of section 416(c) for the plan year pursuant to an 
election under paragraph (f)(2) of this section.
    (iii) SIMPLE 401(k) contributions. An employer may not elect under 
paragraph (f) of this section to exclude long-term, part-time employees 
from the application of the SIMPLE 401(k)

[[Page 82816]]

provisions of section 401(k)(11) and (m)(10). Accordingly, a plan 
intended to satisfy the SIMPLE 401(k) provisions of section 401(k)(11) 
or (m)(10) must satisfy the matching or nonelective contribution 
requirements of Sec.  1.401(k)-4(e) with respect to long-term, part-
time employees.
    (3) Examples. The following examples illustrate the employer 
contribution rules of this paragraph (e). For purposes of the examples, 
each plan includes a cash or deferred arrangement and is maintained on 
a calendar-year basis.
    (i) Example 1. (A) Employer E maintains Plan K, which is intended 
to satisfy the ADP safe harbor provisions of section 401(k)(12). Plan K 
provides that Employer E elects to exclude all long-term, part-time 
employees for purposes of determining whether Plan K satisfies the 
statutory requirements listed in paragraph (f)(1)(i) of this section, 
and the employer election satisfies the requirements of paragraph 
(f)(1)(ii) of this section. Plan K requires Employer E to make a QNEC 
on behalf of each eligible NHCE who is not a long-term, part-time 
employee equal to 3 percent of the NHCE's safe harbor compensation, and 
the NHCEs who receive this contribution include any former long-term, 
part-time employees who are eligible NHCEs. Plan K provides that 
Employer E is required to make a nonelective contribution on behalf of 
each long-term, part-time employee equal to 2 percent of the long-term, 
part-time employee's compensation for the plan year.
    (B) Based on these facts, long-term, part-time employees are 
excluded for purposes of determining whether Plan K satisfies the 
statutory requirements listed in paragraph (f)(1)(i) of this section 
(to the extent the provision would otherwise apply to Plan K), 
including the ADP safe harbor provisions of section 401(k)(12). 
Accordingly, Plan K does not fail to satisfy the safe harbor 
nonelective contribution requirement of Sec.  1.401(k)-3(b) merely 
because a safe harbor nonelective contribution is not made on behalf of 
each eligible NHCE who is a long-term, part-time employee. In addition, 
because long-term, part-time employees are also excluded for purposes 
of determining whether Plan K satisfies the nondiscrimination 
requirements of section 401(a)(4), any nonelective contribution made on 
behalf of a long-term, part-time employee is disregarded for purposes 
of determining whether nonelective contributions satisfy the 
nondiscrimination requirements of section 401(a)(4).
    (ii) Example 2. (A) Employer F maintains Plan L, which is intended 
to satisfy the SIMPLE 401(k) provisions of section 401(k)(11) and 
(m)(10). Plan L provides that Employer F may elect to exclude all long-
term, part-time employees for purposes of determining whether Plan L 
satisfies the statutory requirements listed in paragraph (f)(1)(i) of 
this section. Employer F elects to exclude all long-term, part-time 
employees for the plan year in accordance with the requirements of 
paragraph (f)(1) of this section. Plan L requires Employer F to make a 
matching contribution on behalf of each eligible employee, excluding 
long-term, part-time employees (but including any former long-term, 
part-time employees who are eligible employees), equal to 100 percent 
of the elective contributions of the employee for the plan year, up to 
3 percent of the SIMPLE compensation of the employee for the entire 
plan year. Plan L does not provide for any employer contributions 
(other than elective contributions) to be made on behalf of long-term, 
part-time employees.
    (B) Plan L fails to satisfy the SIMPLE 401(k) provisions of section 
401(k)(11) and (m)(10) for the plan year because Plan L does not 
require Employer F to make the matching contribution on behalf of each 
eligible employee on whose behalf elective contributions were made for 
the plan year.
    (f) Employer elections--(1) Nondiscrimination and coverage--(i) 
General rule. Subject to paragraph (f)(1)(ii) of this section, an 
employer may elect to exclude long-term, part-time employees for 
purposes of determining whether the plan satisfies the following 
provisions:
    (A) The nondiscrimination requirements of section 401(a)(4);
    (B) The ADP test of section 401(k)(3);
    (C) The ADP safe harbor provisions of section 401(k)(12) and (13);
    (D) The ACP test of section 401(m)(2);
    (E) The ACP safe harbor provisions of section 401(m)(11) and (12); 
and
    (F) The minimum coverage requirements of section 410(b).
    (ii) Additional requirements. An employer election satisfies the 
requirements of this paragraph (f)(1)(ii) if--
    (A) The election applies for purposes of every provision under 
paragraph (f)(1)(i) of this section (to the extent the provision would 
otherwise apply to the plan);
    (B) The election applies with respect to all long-term, part-time 
employees who are eligible to participate in the arrangement;
    (C) With respect to a plan that is intended to satisfy the ADP safe 
harbor provisions of section 401(k)(12) or (13), the election is set 
forth in the plan and satisfies the plan year requirements of Sec.  
1.401(k)-3(e); and
    (D) With respect to a plan that is intended to satisfy the ACP safe 
harbor provisions of section 401(m)(11) or (12), the election is set 
forth in the plan and satisfies the plan year requirements of Sec.  
1.401(m)-3(f).
    (2) Top-heavy--(i) General rule. Subject to paragraph (f)(2)(ii) of 
this section, an employer may elect to exclude long-term, part-time 
employees for purposes of determining whether the plan satisfies the 
vesting and benefit requirements of section 416(b) and (c). This 
election does not apply for purposes of determining whether the plan is 
a top-heavy plan as defined in section 416(g). However, in the case of 
an employer that makes an election described in paragraph (f)(1) of 
this section (which has the effect of excluding long-term, part-time 
employees for purposes of determining whether the plan satisfies the 
ADP and ACP safe harbor provisions), the plan will not fail to be 
excluded from the definition of a top-heavy plan under section 
416(g)(4)(H) merely because the employer does not make nonelective or 
matching contributions on behalf of long-term, part-time employees (or 
makes nonelective or matching contributions that do not satisfy the 
requirements for safe harbor contributions).
    (ii) Additional requirements. An employer election satisfies the 
requirements of this paragraph (f)(2)(ii) if--
    (A) The election applies with respect to all long-term, part-time 
employees who are eligible to participate in the arrangement; and
    (B) The terms of the plan provide that long-term, part-time 
employees are excluded from the application of the vesting and benefit 
requirements of section 416(b) and (c).
    (3) Examples. The following examples illustrate the employer 
election provisions of this paragraph (f). For purposes of the 
examples, each plan is maintained on a calendar-year basis and includes 
a cash or deferred arrangement, which is intended to satisfy the ADP 
test of section 401(k)(3).
    (i) Example 1. (A) Employer G maintains Plan M. Plan M provides 
that Employer G may elect to exclude all long-term, part-time employees 
for purposes of determining whether Plan M satisfies every provision 
under paragraph (f)(1)(i) of this section (to the extent the provision 
would otherwise apply to Plan M). Employer G elects to exclude all 
long-term, part-time employees for the plan year in

[[Page 82817]]

accordance with the requirements of paragraph (f)(1) of this section. 
Plan M requires Employer G to make a nonelective contribution on behalf 
of each eligible employee equal to 2 percent of the compensation of the 
employee for the plan year.
    (B) Based on these facts, long-term, part-time employees are 
excluded for purposes of determining whether Plan M satisfies every 
provision under paragraph (f)(1)(i) of this section for the plan year 
(to the extent the provision would otherwise apply to Plan M), 
including the nondiscrimination requirements of section 401(a)(4). 
Accordingly, any nonelective contribution made on behalf of a long-
term, part-time employee for the plan year is disregarded for purposes 
of determining whether nonelective contributions made for the plan year 
satisfy the nondiscrimination requirements of section 401(a)(4).
    (ii) Example 2. (A) Employer H maintains Plan N. Plan N provides 
that all long-term, part-time employees are excluded from the 
application of the vesting and benefit requirements of section 416(b) 
and (c). Plan N requires Employer H to make a nonelective contribution 
on behalf of each eligible employee who is credited with at least 1,000 
hours of service during the plan year equal to 3 percent of the 
compensation of the employee for the plan year. Plan N provides that 
each employee has a 100-percent nonforfeitable right to any nonelective 
contribution Employer H makes on behalf of the employee. Plan N is a 
top-heavy plan with respect to the plan year.
    (B) Based on these facts, long-term, part-time employees are 
excluded from the application of the vesting and benefit requirements 
of section 416(b) and (c) for the plan year. Accordingly, although Plan 
N is a top-heavy plan with respect to the plan year, Plan N is not 
required to satisfy the top-heavy benefit provisions of section 416(c) 
for the plan year with respect to any non-key employee who is a long-
term, part-time employee.
    (g) Applicability date. This section applies to plan years that 
begin on or after January 1, 2024.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-25987 Filed 11-24-23; 8:45 am]
BILLING CODE 4830-01-P