Summary

To encourage participation in 401(k) plans, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) requires employers who sponsor 401(k) plans with eligibility service requirements that exclude long-term part-time (LTPT) employees to allow such employees to make elective deferral contributions if they meet certain conditions. Participation by LTPT employees under the SECURE Act will first begin in the plan year beginning on or after January 1, 2024.

The Upshot

• Under the SECURE Act a 401(k) plan must permit participation by LTPT employees who work more than 500 hours per year in three consecutive years; and are at least age 21 at the end of the three-year period.
• A plan may impose a vesting schedule for employer contributions made on behalf of LTPT employees, and may require no more than 500 hours of service in a year to be credited with a year of vesting service.
• The LTPT provisions apply only to 401(k) plans.

The Bottom Line

Plans must now be operated in compliance with the new LTPT employee rules. For further guidance, reach out to the attorneys in the Employee Benefits and Executive Compensation Group who can assist with a wide range of needs, across the many areas of benefits-related legal compliance.

To encourage participation in 401(k) plans, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) requires employers who sponsor 401(k) plans with eligibility service requirements that exclude long-term part-time (LTPT) employees to allow such LTPT employees to make elective deferral contributions if they meet certain conditions. Participation by LTPT employees under the SECURE Act will first begin in the plan year beginning on or after January 1, 2024.

New Participation Requirement for LTPT Employees

Regardless of a plan’s eligibility service requirement (which may require an employee to work at least 1,000 hours in a 12-month period), under the SECURE Act a 401(k) plan must permit participation by LTPT employees who:

• Work more than 500 hours per year in three consecutive years; and
• Are at least age 21 at the end of the three-year period.

Employers are not required to provide matching or employer contributions to LTPT employees.

For plan years beginning after December 31, 2020, hours of service by part-time employees must be tracked (for the three-year rule) so that part-time employees who have met these requirements can make elective deferrals beginning in the 2024 plan year. Service performed before January 1, 2021, is not considered for purposes of the new eligibility rule (but may need to be counted for vesting purposes, see below).

Even before the new SECURE Act rule could be implemented, the SECURE 2.0 Act of 2022 (SECURE 2.0) changed the rule. Under SECURE 2.0, for plan years beginning after December 31, 2024, the “three consecutive years” period is shortened to two consecutive years. So, an LTPT employee who has at least 500 hours of service in 2023 and 2024 can make elective deferrals in plan years beginning on or after January 1, 2025.

Service performed before January 1, 2023, is not considered for purposes of this new SECURE 2.0 rule (but may need to be counted for vesting purposes, see below).

Vesting for LTPT Employees

A plan may impose a vesting schedule for employer contributions, and may require up to 1,000 hours of service in a year to be credited with a year of vesting service. The SECURE Act includes a different requirement for LTPT employees permitted to make elective deferral contributions.

The SECURE Act and IRS guidance require that LTPT employees be credited with a year of vesting service for each 12-month period during which the employee completes at least 500 hours of service. This includes 12-month periods beginning before January 1, 2021 (but does not include periods in which an employee is under age 18).

This rule applies for employers that provide LTPT employees with matching or employer contributions subject to a vesting schedule. The vesting rule applies only to LTPT employees eligible to participate in the plan because of the new rules. This new vesting rule continues to apply to a LTPT employee even if the employee later becomes a full-time employee.

Complying With the LTPT Rules

Under the SECURE Act, employers can either begin to count hours of service for LTPT employees beginning January 1, 2021 and permit LTPT employees to contribute in 2024 or can implement some alternatives, such as:

• Permitting immediate 401(k) plan eligibility for LTPT employees for elective deferrals; and
• Including a short waiting period for LTPT employees for elective deferral contributions with no hours requirement. However, this requires the employer to include the LTPT employees in nondiscrimination testing.

Other Considerations

LTPT employees are not required to be included in minimum coverage and nondiscrimination testing, including the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests and the top-heavy rules.

The LTPT provisions apply only to 401(k) plans. They do not apply to 403(b) plans or 457(b) plans, nor do they apply to collective bargaining units.

Plan Amendment Deadline

Plans must now be operated in compliance with the new LTPT employee rules. However, actual amendments to the plan to reflect these new rules can be postponed until the last day of the first plan year beginning after January 1, 2025 (December 31, 2025, for calendar year plans).

The author appreciates the assistance of paralegal Todd Ronnei in drafting this article.

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