Mandatory Long-Term Part-Time (LTPT) employee coverage in 401(k) plans begins January 1, 2024! Is your organization prepared? Now is the time to start planning for LTPT employees’ inclusion in the company 401(k) plan starting January 1, 2024.

Retirement plans are permitted to require that employees meet a minimum age (at least age 21) and service (historically not to exceed 1,000 hours of service) condition to participate.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0) added mandatory coverage in 401(k) plans of workers who are considered long-term part-time (LTPT) employees. Under these Secure 1.0 rules taking effect in 2024, a LTPT employee is a non-excludable, non-union employee who completes at least 500 hours of service in each of three (3) consecutive 12-month computation periods (applicable in this case for the years 2021, 2022 and 2023).

SECURE 2.0, which was enacted at the end of 2022, further expanded LTPT employee coverage by making the LTPT inclusion enforceable under ERISA (Employee Retirement Income Security Act of 1974), expanding coverage to 403(b) plans, and most notably reducing the required number of years with at least 500 hours from three (3) consecutive years to two (2) consecutive years, effective January 1, 2025.

As the start of 2024 rapidly approaches, it is important to understand the new rules, to know how they apply to your plan, and to start determining the employees that will need to be offered plan participation.

LTPT under SECURE Act 1.0: Effective for Plan Years Beginning On or After January 1, 2024

Under SECURE 1.0, LTPT employees must be provided the opportunity to make salary deferral contributions to 401(k) plans if they have worked between 500 and 999 hours of service during each of the three applicable 12-month periods in 2021, 2022 and 2023. All service performed prior to 2021 is disregarded.

LTPT employees are required to be allowed to make salary deferral contributions to the 401(k) plan. However, the plan sponsor is not required to provide ANY employer contributions to the LTPTs, including required safe harbor contributions if the plan uses the 401(k) safe harbor rules to satisfy the ADP/ACP Test and/or required minimum contributions if the plan is top-heavy.

Note that if the employer optionally decides to include the LTPT employees in the allocation of any employer matching contributions, those employees are no longer treated as excludable employees for purposes of nondiscrimination testing. That means that the LTPT employees would be included in the ADP/ACP Test and would be considered for top heavy minimum contributions. In a large company, those implications will likely not have an impact on plan operation because large plans are generally not top-heavy and the LTPT employees can be otherwise excludable in the ADP/ACP Tests. To avoid unintended inclusion of LTPT employees for top heavy minimum contributions, small plans may require more careful consideration when designing the plan provisions for years starting in 2024.

Employers may still apply an age 21 requirement for the LTPT employee group, and these new requirements do not impact the exclusion of collectively bargained employees (i.e., union members) and non-resident aliens.

Long-Term Part-Time Employees do not impact coverage, they do not count for the top- heavy testing and are excluded from nondiscrimination testing…as long as they are only permitted to make elective deferrals.

LTPT under SECURE Act 2.0: Effective for Plan Years Beginning On or After January 1, 2025

SECURE 2.0 further expanded coverage for LTPT employees by making two additional changes:

• Expanded the LTPT coverage rules to 403(b) Plans effective 1/1/2025, and

• Reduced the number of years with 500-999 hours from three (3) consecutive years to two (2) consecutive years.

SECURE 2.0 also clarified a few of the rules applicable to LTPT employees:

• Service for vesting purposes is excluded prior to 1/1/2021, and

• Made LTPT rules enforceable under ERISA.

Unfortunately, what SECURE 2.0 did not do was to offer guidance on certain technical aspects of the top-heavy testing (unclear as to whether their balances are included or excluded in the test, or may be optionally included), and whether LTPT employees in an otherwise excludable classification of employees could continue to be excluded (for example, if a plan excludes all employees of Division A but Division A uses part-time workers).  It appears that any LTPT employees of an excluded division may continue to be excluded, but that any service-related exclusions (part-time, seasonal, and temporary) must satisfy the new LTPT rules.

As of the date of this blog, LTPT employee balances will be included in the participant count for the Form 5500 filings. That could change if further guidance is issued, but for now they are in the head count.

12-month Eligibility Computation Period

Plan documents define the computation period that is used to determine eligibility under two different methods, both of which are 12 months. The first method is “anniversary date” which requires that hours be counted from initial date of hire to the 12-month anniversary date, and each anniversary date thereafter. The second method is based on the 12 months starting with the initial date of hire to the anniversary date, then switches to a plan year calculation.

To understand the difference, let’s assume Suzy is initially hired by Company A on June 6, 2021.

Under the “anniversary date” method, Suzy’s three consecutive 12-month eligibility periods would be:

• 6/6/2021 to 6/5/2022

• 6/6/2022 to 6/5/2023

• 6/6/2023 to 6/5/2024

If Suzy works at least 500-999 hours in each of those three periods, she will enter the Company A 401(k) plan on the next plan entry date coincident with or next following June 6, 2024.

If the Company A 401(k) plan uses the “plan year switch” method (and assuming the plan runs on a calendar year plan year), the calculation would be as follows:

• 6/6/2021 to 6/5/2022

• 1/1/2022 to 12/31/2022 (plan year switch - includes the one-year anniversary of date of hire)

• 1/1/2023 to 12/31/2023

If Suzy works at least 500-999 hours in each of those three periods, she will enter the 401(k) plan on the next plan entry date coincident with or next following December 31, 2023 (e.g., January 1, 2024).

As demonstrated, Suzy would enter Company A’s 401(k) plan at different times depending on how the eligibility computation period is defined in the plan document. Understanding how the hours calculation period works for the 401(k) plan is critical in determining when the LTPT employees are first eligible to participate in the plan.

Best Practices: Consult with your 401(k) service providers to confirm how the plan document defines the eligibility computation period. Many providers have default provisions written into the basic plan documents, and not all providers use the same methodology.

Vesting Challenges for LTPT Employees Offered Employer Contributions

Likely one of the more challenging issues to arise from the LTPT regulations is the calculation of vesting for any employer contributions (if optionally made to LTPT employees). In most plans, a participant must work 1,000 hours in a 12-month period (usually the plan year) to earn a year of service for vesting purposes. For LTPT employees, vesting credit must be provided if they work at least 500 hours, rather than 1,000.

Where things get muddy is after a LTPT employee works 1,000 hours in a plan year and becomes eligible for the benefits that are available to full-time employees. According to the regulations, LTPT employees who change status continue to have hours counted under the 500 hours rule for vesting purposes. Yes, you read that correctly. Regular full-time employees would be required to work 1,000 hours for a year of vesting credit, but LTPT employees remain permanently on the 500 hours for vesting credit. Fingers crossed that technical guidance is issued to clarify this requirement!

It is also unclear at what date the computation period begins for the 500 hours for vesting (e.g., is it date of hire or the plan year). What is clear is that plans may continue to exclude years of service for vesting prior to age 18 for all employees, including LTPTs.

Practical Note: Plan sponsors who do not want the added responsibility of tracking hours of service for the LTPT employees under different rules than other employees, should ensure that the plan document is drafted to include LTPT employees for deferrals only (i.e., ensure LTPT employees are excluded from employer contributions).

Q&A regarding LTPT Employees

1. Can the plan automatically enroll LTPT employees? Absolutely!

2. What happens if an LTPT employee subsequently works over 1,000 hours? The LTPT employee is no longer considered under the LTPT rules and becomes a “regular” participant (eligible for deferrals and any employer contributions) as of the first day of the next plan year.

3. Can the plan exclude seasonal employees, temporary employees, and interns? More guidance is expected, as it is unclear if the LTPT rules would extend to these contingent workforce classifications of employees. It is likely that a blanket exclusion would be viewed as an indirect service requirement that results in an impermissible service condition.

4. What if we do not have a service requirement for participation in our 401(k) plan? If the plan allows employees to make deferrals immediately upon hire, the plan may be exempt from the LTPT rules; however, that also implies that no employees would be excluded from employer contributions and nondiscrimination testing. 

5. What if our plan uses elapsed time or hours equivalency for determining service? Unfortunately, it is currently unclear if the plan can use these methods for non-LTPT workers but apply an actual hours of service method for LTPT employees. Additional guidance is needed to address these technical issues.

6. Our plan document excludes part-time employees until they have worked 1,000 hours of service, will the plan document require an amendment before the end of 2023? Likely yes, but check with your service provider for any specific plan document changes that may be required for your 401(k) plan.

More Guidance Expected

The good news is that more guidance is expected from the IRS to address the unclear technical aspects of the LTPT employee regulations. The bad news is that we do not know when that additional guidance will be released. As with other changes in the regulations from years past, service providers and plan sponsors are expected to operate under a good faith interpretation of the rules until further guidance is issued.

Best Practices: Consult with the plan service providers to ensure that the legal plan document is drafted appropriately for your specific employee population. Discuss hours tracking and service counting methodology, excluded employee groups, and any other provisions that relate to LTPT employees as soon as possible. Service providers will be inundated at year end; therefore, plan sponsors should have these discussions completed by the end of September or October to ensure a successful transition to the new rules.

Conclusion

Expanding coverage to millions of workers who would not otherwise be able to participate in an employer’s 401(k) plan solely because of part-time status is a positive leap forward in securing Americans’ retirement. Although the impact and effectiveness of these rules will not be known for several years to come, the hope and anticipation is that more employees will have a nest egg at retirement to rely upon. As any good pilot would warn - we are going to experience some turbulence in the coming years, so keep your seat belts fastened and stay tuned for more to come.

Newfront’s Retirement Services team is available to assist you with questions regarding plan operation, compliance or other retirement plan questions that may arise. Email us at 401kHelp@newfront.com. 

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