401(k) Plans and Expanded Coverage for Part-Time Employees
The federal SECURE 2.0 Act of 2022 (SECURE 2.0) added new provisions regarding participation by long-term part-time employees (LTPT Employees) in 401(k) and ERISA-covered 403(b) plans.
Background Pre-SECURE Acts
Before the SECURE Act and SECURE 2.0, ERISA and the Internal Revenue Code governed the minimum participation requirements for qualified retirement plans. Qualified plans could not require a period of service extending beyond the later of age 21 or one year of service. A plan could require 1000 hours of service in a 12-month period to attain a year of service.
Plans may have different eligibility requirements for different types of contributions. A common provision is allowing immediate participation for elective deferrals but imposing a year of service requirement to receive employer matching contributions. Plans cannot completely exclude classifications of employees (e.g., part-time, temporary, seasonal) if they meet the minimum participation requirements noted above. Most plans that do exclude a class or classes of employees include a provision “unless they work 1000 hours in the period.”
SECURE Act LTPT Employee Rules
Under the SECURE Act rules, employees who complete three consecutive 12-month periods with at least 500 hours of service, and who otherwise meet the plan’s age requirement must become eligible to make elective deferrals. Employees who meet this requirement are referred to in the SECURE Act as “LTPT Employees”.
The SECURE Act LTPT Employee rules apply to years beginning on or after December 31, 2020. Therefore, the first year that LTPT Employees would meet the new requirements would be plan years beginning on or after December 31, 2023. This rule will be in effect only until December 21, 2024 when SECURE 2.0 supersedes it.
SECURE 2.0 Changes to LTPT Employee Rules
- SECURE 2.0 expands the LTPT Employee rules and is effective for plan years beginning after December 31, 2024. So, there is one year of the SECURE Act LTPT Employee rules (described above) before the SECURE 2.0 LTPT Employee rules are effective.
- SECURE 2.0 reduced the measurement period for determining LTPT Employee status from three years to two years.
- SECURE 2.0 clarifies that only service during and after 2021 is counted for eligibility and versing in any employer contribution.
- Once an employee becomes eligible to contribute to the plan, that employee remains eligible to participate as long as the employee remains employed in a unit or division that is covered by the plan.
Key Takeaways for Employers
- These rules are very complicated and require discussions with your service providers and legal counsel.
- Plan sponsors need to review their plans and work with service providers and counsel for any necessary amendments for the LTPT Employee rules that are effective in 2024. It is critical that plan sponsors have the data for hours worked by its part-time employees. If hours data does not exist or is unclear, there are alternatives available under the Department of Labor rules and your Stall Legal attorney will be able to assist you if needed.
- There are different plan changes that could be made in order to comply with these new rules and now is the time that you should engage with legal counsel and your service provider to ensure compliance.
As always, if you have any questions on this topic, please contact your Stall Legal attorney.