Have You Been Counting Those Long-Term Part-Time Employee Hours? Initial Plan Year Eligibility is Fast Approaching.

Bricker Graydon LLP

Bricker Graydon LLP

In efforts to expand access to retirement savings programs for more Americans, the SECURE Act and SECURE 2.0 both included new rules that will require plans to allow long-term part-time (LTPT) employees to make elective deferrals into a 401(k) plan if they meet certain minimum hours requirements. This post updates our earlier post on the subject as a reminder because the effective date is fast approaching and to share the expansion of the LTPT rule in SECURE 2.0.

Under the SECURE Act, for plan years beginning on or after January 1, 2021, an employee that works 500 or more hours in three consecutive years must be allowed to make elective deferrals into the employer’s 401(k) plan. Employers should have been counting hours because their LTPT employees will first be eligible to defer during the 2024 plan year if they have worked the requisite 500 hours during the last three years.

Plan Year 2021

Plan Year 2022 Plan Year 2023 Plan Year 2024
500 hours 500 hours 500 hours

Eligible to make salary deferrals

Beginning with the 2025 plan year, SECURE 2.0 expanded the rule to include ERISA-covered 403(b) plans (for those categories of employees that may have been excluded from universal availability) and shortened the required work time. After 2024, LTPT employees will need to work 500 or more hours for two consecutive years to be eligible to defer into their employer’s plan.

Plan Year 2023 Plan Year 2024

Plan Year 2025

500 hours 500 hours

Eligible to make salary deferrals

Some other points to remember about the LTPT rules:

  • Counting is consecutive, not cumulative. If an employee misses a year, counting starts over.
  • The plan’s age and entry date requirements still apply to LTPT employees.
  • LTPT employees may be excluded from coverage and non-discrimination testing.
  • When counting hours, a plan must count hours in the employee’s first 12 months of employment, and then can use annual periods based on the anniversary of employment or can switch to plan years beginning with the plan year that starts in the first 12 months of employment.
  • The plan should count hours for LTPT purposes the same way it counts service hours for other purposes.
  • Employer contributions are not required for these participants, but are permitted.
  • If LTPT employees receive employer contributions, they also get credit for a year of vesting service when they work 500 hours or more, though service accrued prior to January 1, 2023 does not have to be taken into account for vesting purposes.

Finally note that plans established on or after January 1, 2024 are required to include automatic enrollment provisions. LTPT employees that are eligible to participate in the new plans will also need to be automatically enrolled.

[View source.]

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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