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By: Corey Zeller, MSEA, CPC, QPA, QKA and Barry Greenstein, CPC, QPA, QKA
Readers of our newsletter, or almost any retirement plan-related news over the last few years will have heard talk about the long-term part-time (LTPT) rules, which were added to the law by the SECURE Act back in 2019. We’ve been through a global pandemic, multiple pieces of legislation and regulations, and countless other events since then, but on January 1, 2024, many plans could see their first employees becoming eligible under this rule.
What is Long Term Part Time?
Under current law, employers may impose minimum age and service conditions on participation in their 401(k) plans. The maximum age that can be required is 21, and the maximum amount of service that can be required is one year, defined as 1,000 hours of service in a 12-month period. Once an employee satisfies those conditions, they must be allowed to participate in their employer’s 401(k) plan, unless they are excluded under a non-service based classification (for example, union employees).
The SECURE Act of 2019 (now sometimes known as SECURE 1.0—like World War I, the number got added only after the second one happened) added a new maximum service condition for 401(k) plans, designed to extend coverage to long-term part-time employees. Under this rule, employees who complete three consecutive years in which they work at least 500 hours of service in each year must be allowed to participate in their employer’s 401(k) plan. Years starting in 2020 or earlier are disregarded for determining the three consecutive year period.
In 2022, the SECURE 2.0 Act was signed into law, reducing the number of consecutive years required from three to two. SECURE 2.0 also extended the LTPT rule to 403(b) plans. These changes are effective for 2025.
Who is affected by this change?
The short story is that all 401(k) plans need to comply with this rule.
Long-term part-time employees must be allowed to defer into their employer’s 401(k) plan, however they do not need to receive any employer contributions, including matching contributions, safe harbor contributions, or top heavy minimum contributions.
If an employee who is a long-term part-time employee later completes 1,000 hours of service in a year, they would be treated as a regular participant thereafter and be entitled to the same contributions as any other participant.
Examples, please?
Let’s say your plan is a calendar-year plan with a 1-year, 1,000-hour service requirement to become eligible, and the plan’s entry dates are the first of each month. An employee was hired on May 5, 2021 and worked more than 500 hours (but less than 1000 hours) each year since then. When does this employee enter the plan under the LTPT rule?
Their 3 consecutive years would be May 5, 2021 - May 4, 2022; May 5, 2022 - May 4, 2023; and May 5, 2023 - May 4, 2024. The next entry date would be June 1, 2024, and that is the first date the employee would be eligible to participate.
But not so fast—many plans use a “switch to plan year” rule for determining eligibility service. That means that after the first 12 month period (which always begins on the employee’s date of hire), subsequent measurement periods are measured on the basis of the plan year. This makes it easier to administer the rule, but it also has the effect of shortening the period of service, because there is always some overlap in measurement periods. If the plan uses this rule, then the 3 consecutive years would be May 5, 2021 - May 4, 2022; January 1, 2022 - December 31, 2022; and January 1, 2023 - December 31, 2023. Then the employee would become eligible on the next plan entry date, which is January 1, 2024.
If the employee’s date of hire was May 5, 2023 instead, then the eligibility date would be June 1, 2025 (or January 1, 2025, if the plan uses the “switch to plan year” rule), using the SECURE 2.0 change to two years of service.
That’s not all…
On November 24, 2023, the IRS released proposed regulations on LTPT rules for 401(k) plans. These proposed regulations largely clarified the eligibility rules as already discussed, but they did include one significant new rule.
While employers are not required to make any matching or other employer contributions to LTPT employees, they are not prohibited from doing so. The law requires that for purposes of vesting, LTPT employees must be treated as earning a year of vesting in any year in which they work 500 hours of service. Normally, a plan may require that an employee complete 1000 hours of service in a year to earn a year of vesting service.
The proposed regulations contained a rule that says this 500 hour vesting rule would apply not just to LTPT employees, but also to former LTPT employees—that is, employees who originally became eligible under the LTPT rule, but later worked 1,000 hours of service and became a regular participant.
This can lead to confusing and counterintuitive situations; for example, an employee who enters the plan as LTPT and works part-time for many more years could later earn 1,000 hours and be fully vested in the first year that they are ever eligible to receive a contribution.
What should plan sponsors do?
Sponsors of 401(k) plans largely have two choices—either comply with the LTPT rules, or avoid them.
How to comply with LTPT rules
Sponsors should already be familiar with their obligation to identify employees who are becoming eligible for the plan on each entry date throughout the year. What’s changed is that they will now have to examine employees under two sets of eligibility criteria to see if they enter on any given entry date.
Plans that use the “switch-to-plan-year” rule, as discussed above, are likely to have employees entering as LTPT employees on January 1, 2024 (or the first day of their plan year, if it is not a calendar-year plan). These plans should examine their population of currently-ineligible employees as soon as possible to determine who will need to be offered enrollment options.
How to avoid LTPT rules
As mentioned earlier, LTPT rules apply to all 401(k) plans. So by avoiding LTPT rules, we really mean making sure that no employees enter as LTPT employees, thereby saving the employer from having to check two separate sets of eligibility criteria.
Essentially this means modifying the plan’s normal eligibility criteria to something less restrictive than either the normal 1-year/1000-hours rule or the LTPT rule. One way to do this is to simply let all employees participate in the plan immediately upon their date of hire. Another way would be to keep the 1-year period, but require only 500 hours during that year, instead of 1,000. There are other ways as well.
This not only avoids the burden of maintaining two sets of eligibility rules, but also the separate vesting rules for LTPT employees.
Going forward
This is a big change to the way that 401(k) plan administration works. Given the late date on which the IRS published its proposed (not yet finalized) regulations, it is reasonable to expect that IRS will be lenient in enforcement, and we are hoping that a simplified compliance rule will be made available for sponsors who may have difficulty implementing this timely.
One gift the IRS gave us in the proposed regulations is that any plan document amendment made to comply with the LTPT rules—even one made to “avoid” the rules by changing the plan’s normal eligibility requirements—does not need to be adopted in writing until the end of the 2025 plan year.
Speaking of the proposed regulations—as of the publication of this newsletter, the public comment period is still open. If you have thoughts on what the IRS should or shouldn’t include in their final regulations, you can let them know at regulations.gov.