Prior to the proposed regulations, there was no definition of an LTPT employee. The proposed regulations would define "long-term, part-time employees" to mean employees who:

The proposed definition would exclude employees who are:

Additionally, the proposed regulations include several examples illustrating the proposed definition.

To be eligible to participate as an LTPT employee under the proposed regulations, an employee must qualify solely by meeting the age and 500-hours service requirements. An employee who is immediately eligible to participate or becomes eligible to participate by meeting other service requirements would not be considered an LTPT employee.

In response to Notice 2020-68, a commenter requested that the IRS allow employers to use the elapsed time method to determine if an employee has met the service hours requirement. Under this method, a year of service is measured based on a period of time (as opposed to counting hours of service) that elapses while the employee is employed.

Under the proposed regulations, for elapsed time plans, since hours of service are not credited, the LTPT employee rules do not apply. This is because employees who meet the eligibility requirements under elapsed time plans are already eligible to participate after completing a year of service.

A commenter also requested that the IRS allow employers to use an equivalency method to determine whether an employee meets the 500-hours service requirement. Under an equivalency method, an employer credits employees with minimum hours of service based on their service or earnings during a given period. Because an equivalency method credits the employee with a specific number of hours, the proposed regulations would allow employers to use this method to determine whether an employee meets the service hours requirement.

Regarding the timing of an employee's participation as an LTPT employee, the proposed regulations would adopt the rules used for other employees, which is the earlier of:

(26 U.S.C. § 410(a)(4); 26 C.F.R. § 1.410(a)-4(b).)

Under the proposed regulations, an employer must consider all 12-month periods in which an employee completes at least 500 hours of service when determining an employee's eligibility as an LTPT employee beginning on the employee's hire date. This period can switch from the anniversary of the hire date to the plan year (if provided in the plan). Service performed before January 1, 2021, however, would not be considered for purposes of determining whether an employee is eligible to participate as an LTPT employee.

In response to a comment on Notice 2020-68, the proposed regulations would clarify that a plan may impose other conditions for employees to be eligible to participate, so long as the conditions do not effectively impose an age requirement or a service requirement that is longer than the periods set out in the Code (26 U.S.C. § 401(k)(2)(D)(i) and (ii)).

Under the proposed regulations, plans cannot impose elective contribution restrictions on LTPT employees who are non-highly compensated employees (NHCEs) that could not also be imposed on an NHCE in a safe harbor 401(k) plan (see Practice Note, Safe Harbor 401(k) Plans: Overview and Planning Opportunities: Restrictions on Safe Harbor Contributions).

Regarding vesting, the proposed regulations would require that LTPT employees be credited with a year of vesting service for each 12-month period during which the employee completes at least 500 hours of service. Periods before January 1, 2021, can be excluded for this purpose.

The proposed regulations provide that if a LTPT employee becomes eligible to participate because of the LTPT employee rule, but later completes one year of service or becomes an ineligible employee, the LTPT employee becomes a former LTPT employee. Former LTPT employees are not excluded from the nondiscrimination, coverage, and top-heavy testing requirements but the vesting rules for LTPT employees apply.

Under the proposed regulations, employers would be permitted to exclude LTPT employees from minimum coverage and nondiscrimination testing. However, if an employer excludes LTPT employees from testing, it must apply to all LTPT employees.

The IRS indicates that taxpayers may rely on the proposed regulations before they are finalized. Plan amendments are required by the end of the 2025 plan year.