Section 125 Part-Time EEs 

Overview of Section 125

Section 125 modifies existing guidelines for 401(k) plans and is a new requirement for ERISA 403(b) plans to provide part-time employees with greater access to employer-sponsored retirement plans. Under previous regulations, part-time workers were often overlooked, excluded from participating in 401(k) and 403(b) plans due to not meeting the minimum work-hour threshold. This mandatory provision is effective for plan years beginning January 1, 2026. This mandatory provision was effective for plan years beginning January 1, 2025; however, the Internal Revenue Service (IRS) issued a one-year delay under Notice 2024-73 on October 3, 2024 moving the effective date to January 1, 2026.

Key Features of Section 125

• Eligibility changes. Lowers the eligibility threshold for part-time workers who wish to participate in 401(k) and 403(b) plans. Specifically, it allows employees who work at least 500 hours a year for a minimum of two consecutive years to enroll in their employer-sponsored plans.
• Long-term inclusion. Acknowledges the role part-time employees play in the workforce and promotes their long-term financial security by ensuring they can save for retirement, even if they don’t work full-time hours.
• Streamlined enrollment. Simplifies the enrollment process for eligible part-time workers, making it easier for them to participate in retirement savings programs and benefit from employer contributions.

Implications for Part-Time Workers

• Increased savings potential. For part-time workers, the ability to join a 401(k) and 403(b) plan means more opportunities for retirement savings. This provision can significantly enhance their financial security and prepare them better for retirement.
• Improved financial awareness. Greater access to retirement plans encourages part-time employees to become more informed about retirement savings options. As awareness grows, workers can make strategic decisions about their financial futures.
• Support from employers. Employers will play a crucial role by offering education about the benefits of participating in 401(k) and 403(b) plans. Increased communication will help part-time workers understand how to take advantage of these new opportunities.

Implications for Employers

• Adjusting retirement plans. Employers will need to modify their retirement plan structures to accommodate the inclusion of part-time employees. This may involve updating plan documents and ensuring compliance with the new regulations.
• Employee engagement and retention. Offering retirement benefits to part-time workers can enhance overall employee satisfaction and loyalty. By providing opportunities for all workers, employers create a more inclusive environment that values contributions from all team members.
• Administrative considerations. While implementing Section 125 may require additional administrative work, the potential benefits of increased employee retention and satisfaction can outweigh these challenges. Employers should prepare resources to assist with changes in eligibility and communication strategies to engage part-time employees.

Action steps employers should take prior to the effective date of January 1, 2026

• Ensure that payroll systems can track hours of service and eligibility and report this information as required to retirement plan providers.
• Understand the eligibility rules for plan participation. For ERISA 403(b) plans the requirements for long-term part-time (LTPT) apply in addition to the Universal Availability Rule and notwithstanding exceptions to the rule. The Treasury regulations permit a 403(b) plan to exclude certain employees, including:
  • employees who normally work less than 20 hours per week
  • students performing services described in IRC Section 3121(b)(10)
  • nonresident aliens described in IRC Section 410(b)(3)(C)
  • employees who are eligible to make elective deferrals under another 401(k), 403(b) or 457(b) plan sponsored by the same employer

Additional guidance was provided through Notice 2024-73 addressing eligibility and requesting comments on the content of the notice.

Student Employees Exempted

On October 4th the Department of the Treasury and the IRS issued guidance, IRS Notice 2024-73, confirming that student employees are not considered long-term, part-time employees of their colleges and universities for the purposes of retirement savings in 403(b) plans. 403(b) plans are not required to provide student employees the right to make elective deferrals into a plan, even if that student otherwise qualifies for long-term, part-time employee classification under ERISA.

Enable your part-time workers to take action and increase their retirement savings.

Section 125 of the SECURE 2.0 Act represents a significant shift in how retirement benefits are extended to part-time workers. By allowing greater access to 401(k) and 403(b) plans, this provision seeks to provide more equitable retirement savings opportunities.

As we approach the implementation of these changes (effective for plan years beginning January 1, 2026), it is vital for employers to communicate effectively with their workforce and offer robust educational resources. For part-time employees, the expansion of retirement benefits can encourage long-term financial planning and enhance their overall well-being.

Ultimately, Section 125 stands to strengthen the connection between employers and part-time workers, fostering a more inclusive workforce and contributing positively to the nation's economy and future prosperity.

As these SECURE 2.0 provisions become effective, employers will have more flexibility in helping employees achieve personal and financial wellness. For more information about these and other SECURE 2.0 provisions, reach out to your Corebridge Financial representative and visit our SECURE 2.0 website. This online resource breaks down and simplifies relevant provisions of SECURE 2.0. We will continue to update the website with more relevant and timely content—so please visit often.

Visit the SECURE 2.0 website

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