Are You Counting LTPTEs for Your 401(k) Plan?

Nelson Mullins Riley & Scarborough LLP

The Setting Every Community Up for Retirement Enhancement Act of 2019 (the Act) made changes in the qualified plan rules for eligibility and vesting with respect to so-called “long-term part-time” employees (LTPTE). The changes are designed to allow LTPTEs to make elective deferrals to a 401(k) plan and, if the employer chooses to provide matching or nonelective contributions to LTPTEs, to permit vesting service based on 500 Hours of Service rather than 1000 Hours of Service. While the first LTPTEs will be eligible to elect deferrals in 2024, employers with 401(k) plans need to start now to identify and prepare for LTPTEs.

Note that these provisions for LTPTEs are only applicable to 401(k) plans; they are not applicable to 403(b) or 457(b) plans.

Eligibility for Deferrals

While the Act is effective as of January 1, 2021, it provides for eligibility of a part-time employee if:

  • The employee has worked 3 consecutive 12-month periods
  • In each 12-month period, the employee has at least 500 Hours of Service (determined like any other Hours of Service)
  • The first 12-month period started no earlier than January 1, 2021
  • The employee has attained age 21 at least by the end of the third 12-month period.

The first LTPTE will thus be eligible for a 401(k) plan as of January 1, 2024. However, the plan must begin to identify part-time employees and their Hours of Service as of January 1, 2021 in order to know if the 3 12-month periods have been satisfied.

An LTPTE who becomes eligible for the 401(k) plan is eligible to make 401(k) pre-tax deferrals on the same basis as other employees.

Note that the Act applies to employees of the employer. Employers should review the provisions of their 401(k) plan applicable to leased employees to be sure that they are not considered LTPTEs.

Eligibility for Matching or Other Contributions Not Required

An employer can choose to allow LTPTEs to become eligible for matching or nonelective contributions under the employer’s 401(k) plan. This is not required. Because the 3 consecutive years is an equivalent to a regular employee meeting the age 21/Year of Service (1000 Hours of Service), additional eligibility service is not expected to be permissible for matching or other employer contributions.

Vesting

The 401(k) pre-tax deferrals are always 100% vested and 401(k) deferrals by LTPTEs will also be 100% vested. If an employer chooses to make matching or other contributions that are subject to a vesting schedule, the Act requires the plan to credit each 12-month period of an LTPTE with at least 500 Hours of Service as a Year of Service. 

This includes 12-month periods before January 1, 2021 and continues to be the method to determine the LTPTE’s vesting service even if the LTPTE becomes a regular employee. Thus, the 401(k) plan needs to keep records of part-time, non-regular employees and their Hours of Service even before January 1, 2021, subject to the Break in Service rules. There is a one-year Break in Service if the employee does not have at least 500 Hours of Service in that year. There is a break in vesting service if there are five consecutive years with a Break in Service or, if lesser, the number of years with a Break in Service exceeds the number of years credited with a Year of Service.

Instead of Hours of Service, a plan may use elapsed time for service counting. A plan may use elapsed time for different classes of employees such as LTPTEs or regular full-time. Under elapsed time counting, an employee is credited with a set number of Hours of Service:

  • 10 hours per day; or
  • 45 hours per week; or
  • 95 hours per semi-monthly pay period; or
  • 190 hours per month
    Note: if an employee works one hour in any of the designated categories above, he/she is credited with the whole number of hours for that category.)

Employers should review their 401(k) plan to determine what service counting is now used, whether it is appropriate for LTPTEs and whether any changes should be made now. In particular, if LTPTEs are likely to be eligible for matching or other contributions and vesting service before 2021 may need to be counted, consideration of service records and counting should be made now.

Plan Amendment

Plan amendments are not due until the last day of the 2022 plan year, December 31, 2022 for calendar year plans. However, because of the service counting requirements, employers should look at their service records now and determine how they wish to comply with the Act.

Note: This summary addresses calendar year plans. For non-calendar year plans, please consult your plan advisor.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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