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SECURE 2.0 Act Alert: Potential Employee Eligibility Issue for 403(b) Plans

Contributor
Emily Toler

Mar 21, 2025

The SECURE 2.0 Act includes significant changes to retirement savings policies that aim to improve retirement readiness. These changes affect 401(k), 403(b), and other retirement plans, particularly in the areas of mandatory enrollment, expanded contribution limits, and adjustments to required minimum distributions (RMDs).

While the SECURE 2.0 Act provides many benefits, nonprofit organizations should be aware of a specific provision that could impact certain 403(b) plans, especially those that exclude employees working less than 20 hours a week (1,000 hours annually).

Requirement to Allow Participation

The SECURE 2.0 Act encourages more inclusive eligibility rules, including offering participation to long-term, part-time employees (LTPTs). LTPTs are employees who have worked at least 500 hours a year for two consecutive years. Years of service before January 1, 2023, are disregarded for purposes of determining if an employee meets the definition of a LTPT. If your ERISA-covered Section 403(b) plan currently excludes employees who regularly work less than 20 hours a week, you need to pay special attention to this new LTPT rule.

With the increased focus on inclusion, the IRS could view failure to offer participation as a compliance issue.

Potential Issue

For employers with ERISA-covered Section 403(b) plans that currently exclude employees who regularly work less than 20 hours a week (1,000 hours annually), there’s a risk of noncompliance if excluded employees worked 500 hours or more for two consecutive years prior to January 1, 2025. Those employees should have been given the opportunity to participate in the plan in 2025.

Failure to extend eligibility to these employees may result in penalties or a requirement to offer participation in the retirement plan retroactively.

Action Items

If your organization has an ERISA-covered Section 403(b) plan, we recommend that you take the following steps:

Review your eligibility requirements – Confirm whether your 403(b) plan currently excludes employees who work less than 20 hours a week. (This is an optional provision, not a requirement.)
Audit historical participation – If you did not give employees who work less than 20 hours a week the opportunity to participate in your 403(b) plan, evaluate the hours these individuals worked during the previous two years. If they worked more than 500 hours a year for two consecutive years, they should have been given the opportunity to participate as of January 1, 2025 (for calendar year-end plans).
Consult with legal or plan experts – Work with your legal counsel or retirement plan experts to determine the best course of action if employees should have been offered participation in 2025. This could include offering retroactive participation or adjusting plan procedures to ensure future compliance.
Notify affected employees – If you determine that certain employees were inadvertently excluded from your 403(b) plan in 2025, you may need to notify them and provide an opportunity for retroactive participation, including any adjustments to contributions or matching funds that were missed.
Update plan documents and policies – Make any necessary updates to your 403(b) plan documents and policies to ensure compliance with the SECURE 2.0 Act provisions, particularly around eligibility and automatic enrollment. Non-governmental 403(b) plans have until December 31, 2026, to amend the plan document, but the policy must be in place now.
Prepare for your audit* – If your plan is subject to audit, ensure that all documentation is in order so you can demonstrate compliance with SECURE 2.0 Act provisions, particularly those concerning eligibility, employee notifications, and participation opportunities for employees working less than 20 hours a week.