UPDATED Nov 2023 for new guidance!
One of the ways 401(k) plans have grown to be the go-to retirement program even over the “free” alternatives like SEPs and SIMPLE IRAs has been the one-year wait, 1,000 hour service requirement for eligibility. Even though that works out to only about 20 hours a week on average throughout the year, it certainly disenfranchised many workers from access to the retirement plan their employer sponsored.
Then along came the SECURE Act…remember the SECURE Act? No, not SECURE 2.0, the first one (yes there was a first one!). The SECURE Act passed in December 2019, just before the CARES Act was passed a few months later for reasons we all remember, I’m sure, which overshadowed basically every provision it enacted that happened to represent the biggest changes to retirement plans since the safe harbor provision in 1999.
One of these provisions created a new classification of employee called “long-term part-time” and was quickly dubbed by the industry as “LTPT” because we love acronyms (and it’s a mouthful, let’s be honest). This classification came in vogue in reaction to an increased interest by many states in expanding access to retirement programs to residents, evidenced by the increase in state-sponsored retirement plan mandates. Many workers who may have found themselves disenfranchised by their employers’ 401(k) plan now will find that they’re now eligible to make income deferral contributions and start saving for retirement, and that’s a good thing.
Here's how it works: Employees who meet the age requirement prescribed by the plan and work 500+ hours in 2021, 2022, and 2023 will find that they are eligible to participate in the 2024 plan year. The wrinkle in this classification which makes life interesting is that the SECURE 2.0 Act changed the rule from three consecutive years to only two but becomes effective in 2025. Therefore, employees who work 500+ hours in 2023 and 2024 will become eligible in 2025; so will employees who meet this requirement in 2022 and 2023 but not 2024, or any two consecutive years of employment even prior to 2021.
What about company contributions, does this law include providing LTPT employees to receive profit sharing and/or matching contributions too? No, the company is not required to provide profit sharing or matching contributions but may opt to do so. If the employee eventually meets the age and service requirements then they would be eligible to receive company contributions. This includes exemption from top-heavy minimum contribution requirements.
So, who’s going to keep track of all this? Sure, companies have access to employee data going back all the way to date of hire but are rehired employees going to be recognized as eligible as LTPT? The fact is that TPAs like Benefit Resources as well as many payroll providers and plan trust recordkeepers are sharpening their pencils to try to add value to plan sponsors to make this requirement as administratively feasible as possible. We suggest you get in touch with your provider team to see who might be picking up this responsibility or if multiple have this new service option available, who is best suited for it.
Not all plans are affected, though, so don’t rush to the phone too soon! Many retirement plans have no income deferral component to their plan at all and are not affected. Also, many plans do not include a number of hours worked before providing access to deferral contributions in the plan (e.g., three months of service) and will find that no employee will meet the LTPT definition and have not already been offered the plan. Other plans create excluded classes of employees which may encompass any employee who might fall into an LTPT classification; excluded employees may continue to be excluded under these new rules. If you’re not sure, that’s why you (hopefully) have a TPA! Don’t have a TPA? Drop Benefit Resources a line and we’ll see if we can help.
Worried about plan testing? Well, we won’t get into it here but suffice it to say that LTPT employees may be tested separately from other eligible employees for most of the important measures for confirming discrimination under the plan is not occurring per IRS regulations.
Worried about class exclusions? The IRS has confirmed that class exclusions may continue to prevent some employees from entering the plan regardless of how many 500+ hour years they've put together, but there's a catch: The class cannot be constructed such that an employee would belong to it simply by virtue of how much work they perform. In other words, plan sponsors should expect that any "part-time" or "seasonal" class exclusions may result in some "excluded" employees becoming classified as LTPT and will need to be offered the plan.
Worried about required notices? Employees classified as LTPT will still need to receive the required notices! Oddly enough, this includes the safe harbor notice which does not apply to them at all as they are not eligible to receive these contributions. Nonetheless, this notice will need to be issued to them on time but should also include an addendum specifically speaking to the fact that none of what's contained in the notice actually applies to them. Good times.
Did vesting ever even occur to you? Welp, here's arguably the worst part of the creation of this new class of employees: Years during which an LTPT works 500+ hours will result in a year of service for vesting purposes. "Who cares?", one might ask, considering LTPT employees can't get company contributions subject to vesting, anyway. (Prepare yourself for the weirdness) If an LTPT employee eventually satisfies the plan's eligibility requirements, they will be eligible to receive those company contributions already partially vested. Even weirder, subsequent vesting years will continue to require only 500 hours for former LTPT employees even though their buddy sitting next to them and everyone else who never was classified as LTPT will still have to work 1,000! Go figure. Have you hugged your TPA lately?
That’s pretty much it in a nutshell! Certainly, there are a number of things plan sponsors should consider when it comes to this new employee class, including changing the eligibility requirements, to keep the plan administration on point. Ultimately, this change will come as a welcome opportunity for some Americans to give them access to a retirement plan that includes an income deferral component as that has been proven to be much more effective at growing retirement savings compared to an IRA, where one has to write a pretty big check come tax season to avail themselves of the option. Yes, it’s different and perhaps a bit cumbersome, but doing retirement plans right is what we do here at Benefit Resources and we look forward to the challenge and the opportunity to work with our neighbors to promote healthy, happy, timely retirement!