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Long-Term Part-Time Employee Woes

on Wednesday, 15 May 2024 in Benefits Quarterly: Morgan L. Kreiser, Editor

To help increase participation in retirement plans, the SECURE Act of 2019 required 401(k) plans to allow “long-term, part-time employees” (“LTPT employees”) to be eligible to make elective deferral contributions.  SECURE 2.0 amended those rules, and in November 2023, the IRS issued proposed regulations interpreting the new laws.  Despite the IRS’s guidance, questions still remain, which is not ideal given that employers were required to comply with the LTPT employee rules effective January 1, 2024.

Background

As background, the SECURE Act of 2019 defines “long-term, part-time employees” as employees who are at least age 21 and complete at least 500 hours of service in 3 consecutive 12-month periods.  The SECURE Act’s provisions applied for all plan years beginning on or after January 1, 2024, so LTPT employees (counting 12-month periods of service on or after January 1, 2021) must be eligible to make salary reduction contributions in 401(k) plans this year.  

SECURE 2.0 reduced the 12-month period requirement from 3 to 2 consecutive periods, effective for plan years beginning on or after January 1, 2025.  SECURE 2.0 also extended the application of the LTPT employee rules to ERISA-covered 403(b) plans.

SECURE 2.0 and the proposed regulations attempted to clarify some ambiguities of the SECURE Act, such as clarifying that LTPT employees may be excluded from a plan’s safe harbor provisions and that all periods of service prior to 2021 may  be excluded.  Still, compliance with these rules has not been easy or straightforward.  Although plan amendments are not required until the end of the 2026 plan year, 401(k) plans must be administering their plans consistent with these rules now.

Questions Remain

One of the biggest items on which clarification is needed is vesting for LTPT employees.  Right now, the proposed regulations confirm that LTPT employees are credited with a year of vesting service for each 12 month period in which they are credited at least 500 hours, and that these vesting rules apply even after an employee has ceased to be a LTPT employee (such as those who move to a full-time position).  This means that plans with 1,000 hours of service requirements for vesting will have to apply a separate 500 hours of service rule for any “former” LTPT employees. 

Furthermore, the proposed regulations explain that in order to exclude LTPT employees from nondiscrimination testing, the plan document must expressly elect such exclusion.  The proposed regulations do not specify the language that must be included in the plan document for this election, nor how safe harbor plans should treat and exclude LTPT employees.  Finally, the proposed regulations do not indicate how to exclude LTPT employees from plans with an automatic enrollment feature.

In all, the LTPT employee rules are fraught with complexity.  Though seemingly simple on their face, the rules present challenges in implementation.  Yet employers are expected to comply with the requirements this year.  As a result, we’ve seen some clients terminate their 401(k) plans in favor of additional taxable benefits for employees.  Regardless, employers should review their current administrative processes to confirm compliance with the rules, or consider whether the 401(k) plan is a right fit.

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