II. Participation

Statement of Requirement: Code §§ 401(k)(2)(D) and 401(k)(4)(A); Reg. § 1.401(k)- 1(e); Notice 2020-68, 2020-38 I.R.B. 567

(Note to reviewer: An employee's eligibility to make Elective Deferrals under a CODA may not be conditioned upon the completion of more than 1 year of service (generally 1,000 hours) or the attainment of more than age 21. However, if the employee satisfies the requirements to be a long-term part-time employee, then the employee must be allowed to participate in the plan’s CODA feature earlier than the completion of 1 year of service.

Section 112 of the SECURE Act and sections 125 and 401(a)(2) of the SECURE 2.0 Act extend CODA eligibility to long-term, part-time employees effective for plan years beginning after December 31, 2020. After revision by the Acts, a long-time part-time employee is an employee who is eligible to participate in a qualified CODA solely by reason of having: (1) completed three consecutive 12-month periods on or after January 1, 2021, during each of which the employee is credited with at least 500 hours of service as defined in § 410(a)(3)(C)) (or, for plan years beginning after December 31, 2024, completed two such consecutive 12-month periods); and (2) attained the age specified in § 410(a)(1)(A)(i) by the close of the last of those 12-month periods. However, under Code §§ 401(k)(15)(D)(ii) and 410(b)(3), certain employees who are covered by a collective bargaining agreement, employees who are nonresident aliens and who receive no earned income from the employer that constitutes income from sources within the United States, or any other employees described in § 410(b)(3) are not considered to be long-term part- time employees for CODA eligibility purposes.

Plan eligibility, as described in DC LRM #18, must reflect CODA eligibility for long-term part-time employees, consistent with this definition and statutory change. See also Prop. Reg. § 1.401(k)–5, 88 FR 82796, for guidance applicable to plan years that begin on or after January 1, 2024, but which taxpayers may rely on prior to the proposed effective date. See also DC LRM # 87 for sample plan eligibility language.)

60 | Cash or Deferred Arrangement (CODA) LRM Package 01-2024

(Note to reviewer: An employee's eligibility to receive Matching Contributions, Qualified Matching Contributions, or Qualified Nonelective Contributions may be conditioned upon the completion of up to 2 years of service. No contributions or benefits (other than Matching Contributions or Qualified Matching Contributions) may be conditioned upon an Employee's making Elective Deferrals.

However, Section 113(a) of SECURE 2.0 amended Code § 401(k)(4)(A) to provide that a de minimis financial incentive (not paid for with plan assets) provided to employees who elect to have the employer make contributions under the arrangement in lieu of receiving cash will not violate the contingent benefit rule of § 401(k)(4)(A), and may also be conditioned upon an Employee’s making Elective Deferrals. For this purpose, a a de minimis financial incentive is one that does not exceed $250 in value and is offered only to employees for whom no election to defer under the the CODA is already in effect. Because this statutory change is not included on the Cumulative List, sample plan language is not included in this regard. However, see Part D of Notice 2024-2, 2024-1 I.R.B. 119, for administrative guidance in this regard.)

(Note to reviewer: Code § 414A, as added by Section 101 of the SECURE 2.0 Act of 2022, requires employers sponsoring new § 401(k) plans to automatically enroll eligible employees with a default contribution rate of at least 3% but no more than 10%, effective for new plans established after December 31, 2024. The default contribution rate thereafter escalates at the rate of 1% per year up to a minimum of 10% and a maximum of 15%. Code § 414A(c) sets forth several exceptions to the application of section 414A(a). Among other exceptions, § 414A(c)(2)(A)(i) and (ii) provide that section 414A(a) does not apply to any qualified CODA established before December 29, 2022. Because this statutory change is not included on the Cumulative List, sample plan language is not included in this regard; however, see Part A of Notice 2024-2. Note that § 414A(a) also applies to starter 401(k) deferral-only plans, for plan years beginning after December 31, 2024, unless an exception set forth at § 414A(c) applies.)

Sample Plan Language:

“LTPT Employee” means any long-term part-time Employee who has completed at least 500 Hours of Service in each of two consecutive 12-month periods beginning after December 31, 2020, has attained age 21, and who is not yet a plan Participant. For plan years beginning on or before December 31, 2024, the previous sentence shall be applied substituting “three consecutive 12-month periods” for “two consecutive 12-month periods.” The term LTPT Employee shall not apply to employees described in Code section 410(b)(3).

Notwithstanding any other provisions in the plan, LTPT Employees shall be eligible to make Elective Deferrals under the CODA feature of the plan. An LTPT Employee shall participate in the CODA feature on the earliest date specified in Section ______ [ENTER THE PLAN PROVISION FOR ENTRY INTO THE PLAN CORRESPONDING TO DC LRM #18].

61 | Cash or Deferred Arrangement (CODA) LRM Package 01-2024

(Note to reviewer: The 12-month consecutive period described above needs to be defined in the plan document, and should be based on the plan's eligibility computation period. See Code § 401(k)(15(D)(ii). See DC LRM #19 for sample plan language regarding the plan’s definition of an eligibility computation period for this purpose.)