Effective Jan. 1, 2024, employers who sponsor 401(k) plans must allow employees who work at least 500 hours a year over a period of consecutive years (“long-term part-time” or “LTPT employees”) to be eligible to make deferrals into the plan. This change requires immediate action by plan sponsors to change the way they administer their plans — specifically, counting service hours and increasing eligibility for LTPT employees.
Plan sponsor considerations for long-term part-time employees
Our Employee Benefits team recommends that plan sponsors reach out to counsel and their plan administrators and recordkeepers to help ensure compliance. The main considerations for plan sponsors include the following:
1. Plan administration changes are required now — but plan amendments can wait. Plan sponsors must begin to administer 401(k) plans in compliance with these new requirements starting with plan years beginning on or after Jan. 1, 2024. Written plan amendments are not due until the end of the 2025 plan year. In addition, while we expect the IRS to issue more guidance, it recently issued proposed regulations that provide guidance to plan sponsors on how to administer the requirements. The IRS has said that employers may rely on the proposed regulations to satisfy their compliance requirements until final regulations are published. The proposed regulations contain many nuances that are not always intuitive.
2. How to identify LTPT employees. LTPT employees are those who are at least age 21 and have completed at least 3 consecutive years of service in which they have worked at least 500 hours. Plan years that start before Jan. 1, 2021, are disregarded when determining who counts as an LTPT employee, which means that the first LTPT employees will be able to make elective deferrals starting with plan years that begin on and after Jan. 1, 2024. Effective for plan years that begin Jan. 1, 2025, the 500 hours of service requirement drops to 2 consecutive years.
Compliance note: Ideally, third party administrators worked with plan sponsors starting back in 2021 to track hours for employees and adjust their administrative systems. If not, plan sponsors may need to dig into historical payroll records back to Jan. 1, 2021 to make these important LTPT employee eligibility determinations. Plan sponsors should review their employee census data to make sure they are identifying LTPT employees and providing proper communications about elective deferrals to the employees, plan administrators, and payroll staff beginning Jan. 1, 2024.
3. Catch-up and Roth deferrals. Interestingly, there is not a requirement to offer LTPT employees the ability to make catch-up contributions or Roth elective deferrals. For the sake of administrative simplicity, plan sponsors choose to allow all eligible participants, including LTPT employees, to be able to make these type of contributions.
4. No requirement to provide LTPT employees with employer contributions. Employers are permitted to make matching or employer contributions on behalf of LTPT employees, but they are not required to do so. The LTPT participation requirement relates only to elective deferrals. Further, safe harbor plans are permitted to exclude LTPT employees from the right to receive safe harbor contributions and have the plan still maintain safe harbor status. Similarly, although LTPT employees are counted when calculating a plan’s top heavy ratio, a plan is permitted to exclude them from receiving top heavy minimum contributions.
By Jan. 1, 2024, plan sponsors should definitely determine their method of plan administration either to exclude LTPT employees from receiving these contributions or to include them. Employers also should review their summary plan descriptions and other communication materials to participants to ensure they are consistent with their plan administration.
5. Special vesting rules for employer contributions allocated to LTPT employees. LTPT employees are always fully vested in their elective deferrals. If an employer chooses to provide employer contributions to LTPT employees as discussed above, special nuanced vesting service-crediting rules may apply.
First, plan years before Jan. 1, 2021, can be disregarded for vesting purposes. Second, a year of service for LTPT employees for vesting purposes can be limited to years in which LTPT employees complete at least 500 hours of service. If an employee first becomes a participant in the plan as an LTPT employee, the regulations suggest that employee will forever earn a year of service for vesting after completing 500 hours of service in a plan year, even if the employee later qualifies for participation as a traditional full-time employee (e.g., by completing 1,000 hours of service). Such an employee would become a “former LTPT employee.”
Consider the following scenario: Suppose a plan excludes LTPT employees from receiving employer contributions such that only participants who complete 1,000 hours of service are eligible to receive such contributions. If an LTPT employee later completes 1,000 hours of service and becomes eligible to receive allocations of employer contributions, can the plan credit years of service for vesting for those contributions only for years in which the employee completes 1,000 hours, or would it have to credit years with only 500 hours? Although not specifically addressed, it appears that the former LTPT employee would receive vesting credit for years in which at least 500 hours of service were performed. That means former LTPT employees could vest under a more generous schedule than those who were never LTPT employees.
6. Exclusion of LTPT employees from nondiscrimination testing. Employers may exclude LTPT employees from all of their annual nondiscrimination testing requirements, including coverage testing, ADP and ACP testing, and top heavy testing. Employers who chose to exclude LTPT employees from nondiscrimination testing need to be mindful of the following:
- A plan sponsor must make a formal election to exclude LTPT employees from testing.
- Safe harbor plans that exclude LTPT employees from contributions must say so in the plan documents.
- The exclusion must be uniform.
7. Elapsed time plans. Plans that do not count hours and instead use the elapsed time method generally are not subject to these rules. That is because these plans permit participation after completing a one-year period of service.
8. 403(b) Plans. The proposed regulations addressed only 401(k) plans, but the SECURE 2.0 Act extended LTPT eligibility to ERISA-covered 403(b) plans beginning with the 2025 plan year. We expect future guidance that closely resembles the 401(k) guidance.
Employers are not required to amend their plans until the last day of the 2025 plan year, but they are required to operate their plans in compliance with these requirements starting with the 2024 plan year. Accordingly, employers should reach out to their plan administrators and work with legal counsel to review their plans and make sure they are prepared to satisfy these new requirements.