We first got a glimpse of the Long-Term, Part-Time (LTPT) rules back in 2019 with the SECURE Act.
Initially, we had to consider employees who were age 21 and were otherwise excluded from plan entrance eligibility. Employees had to have completed at least three consecutive years of service with at least 500 hours of service. The SECURE Act mandated for plan sponsors and payroll teams to track that information starting in January 2021, to be ready to apply on January 1, 2024. Under SECURE 2.0, the rule was modified effective January 1, 2025 and now only requires the completion of two consecutive years of service with at least 500 hours. Additional clarification came under SECURE 2.0 that we could also disregard any work history prior to the 2021 effective date of this rule.
The Long Term, Part Time status was created and defined because it recognized the many part-time employees who may never meet eligibility for a plan, and therefore may never have had the opportunity to participate in a retirement plan and consequently have no retirement savings. It’s imperative for advisors and consultants to communicate to their sponsor clients that this rule also only affects the right to make deferral contributions and does not order or need to affect other employer contributions such as safe harbor, match or profit sharing. However, employers can decide to provide employer contributions to LTPT qualified employees. More on further employer options in a moment.
If a multi-year part-time employee initially qualified under the LTPT rules, but subsequently becomes a full-time employee and meets the maximum eligibility criteria limitation of 1,000 hours, then they must become eligible for all the regular plan contributions, including safe harbor, matching and profit sharing. The LTPT employees are also exempt from inclusion in annual compliance testing, such as the Annual Contribution Tests (ACP) or top-heavy determinations, that are required for the plan so they do not negatively affect any compliance testing results. If the participant changes status and becomes a full-time employee and meets full eligibility later (such as in the example above) then they become part of the compliance testing.
Let’s now talk about the potential pitfalls when it comes to this new rule—the biggest being whether hourly tracking starts in 2021. Is there a payroll provider helping with this tracking requirement? Is the recordkeeping system? For example, Christina has a client with a sizable existing employee footprint, significant weekly on- and off-boarding activity, and a 1,000-hour existing part-time exclusion. Christina has been meticulous about talking to them since early 2020 about the upcoming obligations of the then newly-created LTPT status. The recordkeeper representative in the summer of 2022 repeatedly hand-waved away Christina’s concern and caution to the plan sponsor, because it wasn’t something they needed to worry about until 2024.
While this wasn’t a likely formal position of the recordkeeper at the time, it’s seemed like a short-term placation for a plan sponsor wearing many hats that could potentially have long-term consequences if it becomes a big problem to figure out later on. Has your recordkeeper, third-party administrator, or plan document appropriately documented and captured the provision selections around the LTPT employees if you exclude part-timers from participating? Since we are past January 1, 2025, when those employees may have needed to be eligible to make deferrals, if they were not correctly offered entrance into the plan, now we potentially have to deal with corrections.
As mentioned above, LTPT-qualified employees are not required to receive employer contributions— the provisions are a mandated deferral opportunity only. However, businesses that have the discretionary budget to consider providing an employer contribution may do so. Without regard to a plan’s stated entrance timing for full-time employees, LTPT employees can be limited to enter the plan twice a year, in January and July. Again, a plan can choose to be more permissive and match the full-time employees experience or find a comfortable middle ground. LTPT employees can be limited to not allow for rollovers into the plan of outside assets (former employers plans, or an IRA). For existing plans that have not implemented automatic enrollment provisions, determining if LTPT employees should be automatically enrolled is a conversation to consider regarding plan document amendments.
Finally, another item that we may want to consider changing is vesting service. For plans that determine not to add an employer contribution for LTPT employees, they may want to change their vesting annual hours calculation. In this case, since it is probable that many of these employees that fit this LTPT rule may never receive employer contributions, we may wish to consider moving the rule for a year of vesting service from 1,000 hours down to 500 hours to make it easier to track for the plan as a whole. It’s imperative to have a broad understanding of the larger plan provisions and any resulting impact of making these changes in the document, but it is a lever that may make some plans easier to administer.
A few final considerations of note include the notices that are required for participants. Have all the notices been correctly updated to include this rule (or updated if you changed eligibility) and did those notices go to participants in the required timeframe for the January 1, 2025 enrollment? What about if your plan has automatic enrollment? Were these participants correctly automatically enrolled in the plan if they met those requirements? Again, that would potentially be another area that may need a correction if they were not properly automatically enrolled in the plan.
One of the questions that Theresa ponders on for the Congressional teams who worked on SECURE and SECURE 2.0 involves rule eligibility requirements, and specifically, why legislators did not require the maximum eligibility for an employee to be age 21 with one year of service and 500 hours (instead of the traditional 1,000 hours). It would have ultimately achieved the same result of letting those potential part-time employees participate and save for retirement and made it a whole lot less confusing for everyone. In fact, Theresa has recommended to several of clients that don’t have a lot of employees in this situation to just change to that eligibility requirement for ease.
SEE ALSO: