Much of the employee benefits news this year has related to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, particularly with respect to the greater flexibility it provided 401(k) plan participants with respect to requesting in-service distributions and loans. That is not a surprise during this year of economic upheaval. Updating plan administrative procedures to reflect these CARES Act terms has kept employers busy, but it is important that employers remember that they will need to update their procedures to reflect the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The Internal Revenue Service (IRS) recently reminded employers about these SECURE Act issues in Notice 2020-68. Foreshadowing some of the administrative complexities that employers may face, the notice states that the IRS did not intend to provide “comprehensive” guidance, but instead, simply is trying to assist employers with implementation of key SECURE Act terms.
This blog will focus on perhaps the biggest responsibility for employers that will begin with their 2021 plan years—keeping track of long-term part-time (LTPT) employees and allowing them to make deferral elections under their 401(k) plans.
Eligibility to make elective deferrals
Before enactment of the SECURE Act, IRC Section 401(k) and the related regulations generally prohibited an employer from requiring an employee to complete a period of service that extended beyond the later of the employee’s (i) attainment of age 21 or (ii) completion of a 12-month period during which the employee performed at least 1,000 hours of service in order to participate in the plan. Section 112(a) of the SECURE Act amended the 401(k) rules to provide that if an employee completed at least 500 hours of service in three consecutive 12-month periods, such an employee was an LTPT employee and thus could no longer be prohibited from participating in the plan simply from failure to complete 1,000 hours of service. So long as an LTPT employee is age 21 and not in another excluded class of employees, the LTPT employee must be permitted to make elective deferrals.
For 401(k) plan sponsors, that means they will now have to keep track of hours of service for many part-time and seasonal employees that they may not have otherwise had to keep track. The notice provides some administrative relief for employers:
- Employers are not required to keep track of 12-month periods of service that began before plan years beginning on or after Jan. 1, 2021, for purposes of identifying LTPT employees.
- The first plan year in which an LTPT employee will be eligible to make elective deferrals is the plan year that begins on or after Jan. 1, 2024.
So, there is still a while before LTPT employees will begin to be permitted to make elective deferrals, but employers need to start keeping track of hours during the 2021 plan year.
Vesting of employer contributions
The relief is not quite so generous, however, with respect to vesting of employer contributions allocated to LTPT employees. Both the SECURE Act and the notice make clear that LTPT employees are not required to be eligible to receive any allocations of employer contributions, including safe harbor matching contributions, non-elective contributions and profit sharing contributions. If, however, any such contributions are allocated to LTPT employees, such LTPT employees must be credited with a year of service for vesting purposes during each 12-month period that they complete at least 500 hours of service. Further, employers must count years of service before Jan. 1, 2021.
That requirement probably will take employers by surprise. Ideally, employers will be able to identify hours of service for each year that an employee has been employed, but retrieving and calculating that number could still be administratively burdensome. The IRS did say in the notice that it seeks comments on how to reduce this burden.
Employers need to be aware that they can no longer exclude LTPT employees simply because they do not perform 1,000 hours of service. Employers need to start keeping track of who completes at least 500 hours of service in a year starting with the 2021 plan year so that they can allow LTPT employees to begin making elective deferrals in the 2024 plan year. Further, if employer contributions are allocated to LTPT employees, employers will need to identify all years in which such employees completed at least 500 hours of service in order to provide vesting credit.
The SECURE Act and the notice provide that plan amendments will not be required generally until the end of the 2022 plan year. Thus, plans will not be required to be amended by the end of this year to reflect these new requirements. Employers should work with their third party administrators and counsel, however, to make sure they can begin implementing these new requirements.