In this series of articles, we explore the implications of the long-term, part-time employee rules under the SECURE Act and SECURE 2.0 and the impact those rules have on employers and their workforces.

Under the SECURE Act and the SECURE 2.0 Act, employers must provide long-term, part-time employees—i.e., employees who complete at least 500 hours of service in three consecutive years (reduced to two years in 2025) and are at least 21 years old—the opportunity to make elective deferrals under their 401(k) plans and, beginning in 2025, their 403(b) plans. However, long-term, part-time employees are not required to be eligible for employer matching or profit-sharing contributions until they satisfy the regular plan rules. Despite this fact, one of the most salient issues surrounding the implementation of the new rule is how it impacts—and complicates—tracking when employees become vested in such contributions.

IN DEPTH

Under the new rule, starting with service performed on and after January 1, 2021, employers are required to credit long-term, part-time employees with one year of vesting service for each 12-month measurement period during which the employee is credited with at least 500 hours of service. Service prior to that date is not counted for this purpose.

In its simplest form, theoretically, the rule makes some sense. If an employee is going to be subject to a lesser 500-hour service requirement to enter the plan, as compared to the older 1,000-hour rule, the employee should have an opportunity to vest in matching or profit-sharing contributions made to a plan under a similarly reduced standard. But the application of the rule doesn’t play out quite so simply. This is in large part because the new long-term, part-time employee rule only applies to elective deferrals—which are always fully vested—and does not accelerate plan entry for employer contributions, like matching and profit-sharing contributions, which might be subject to a vesting schedule.

As a result, employers are required to track vesting service for long-term, part-time employees even though this may have no practical effect. Because long-term, part-time employees are not required to be eligible for employer matching or profit-sharing contributions until they satisfy the regular plan rules (e.g., completing 1,000 hours of service in a 12-month period), those employees may never qualify to receive those contributions, at least not while they’re still working a part-time schedule.

And there’s the rub. Employers will need to know how vested a long-term, part-time employee should be in employer contributions if the employee ever qualifies to receive them. But many long-term, part-time employees will only qualify to receive employer contributions after they’re no longer working a long-term, part-time schedule.

Then, things get more complicated.

You might reasonably assume that once long-term, part-time employees stop working long-term, part-time schedules, you should start treating those employees like everyone else, subject to the same rules and vesting terms. But the proposed regulations issued by the Internal Revenue Service (IRS) indicate that is not the case—at least not as it relates to vesting. Instead, less intuitively, the rules provide that employees who enter the plan as long-term, part-time employees must continue to be credited with vesting service for completing 500 hours of service in the designated 12-month measurement period, even if they later stop being considered long-term, part-time employees.

This can produce a somewhat odd result, as a former long-term, part-time employee who becomes a regular employee will still be subject to a vesting schedule based on 500 hours of service, even though other regular employees may be subject to a higher vesting standard (e.g., completing 1,000 hours of service to earn a year of vesting service). Put another way, employers may now find themselves with two employees performing the same job and working the same amount of time but subject to two different vesting standards—all because one employee originally entered the plan as a long-term, part-time employee and the other did not.

As a result, employers will need to take care to establish processes to monitor how vesting is tracked for long-term, part-time employees throughout their careers to ensure that they continue to be subject to more favorable vesting terms even if they eventually begin to work a more full-time schedule.

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