Long-Term Part-Time Employees and Your Retirement Plan
The SECURE Act and SECURE 2.0 Act (the Acts) created a new kind of participant for 401(k) plans (and 403(b) plans as of 2025) called Long-Term Part-Time Employees. Beginning January 1, 2024, employees who have 3 consecutive years of at least 500 hours of service and are at least 21 years of age must be allowed to defer into the plan if they satisfy the other eligibility criteria of the plan, i.e. they are not an excluded class member, etc.
When the Acts were passed, retirement professionals brought up a host of potential issues and things that needed additional guidance or clarification. Shortly after Thanksgiving, the IRS released a set of proposed regulations designed to provide the answers the industry was seeking. Not every question has been answered nor was every problem resolved, but the basics are clearer now and with January 1, 2024 fast approaching here are some FAQs to get you started off on the right track.
What are Long Term Part Time Employees, again?
LTPTs are employees who have attained age 21 and have worked between 500 and 999 hours in each of the last three years, i.e. in 2021, 2022, and 2023. An employee who has worked 1,000 hours in any given year would satisfy the statutory eligibility requirements and be a “normal” participant in the plan, though they would be classified as a “former LTPT”. Note that in 2025, the service requirement is reduced from 3 years to 2 years.
What about employees in Excluded Classes?
Employees who are unable to enter the plan according to the plan’s normal requirements as a member of an excluded class, such as union, leased, or nonresident alien employees, are also excluded from becoming an LTPT. Note that the excluded class cannot be a “proxy for imposing an age or service requirement” that would otherwise not be allowed.
What kind of plans are affected?
For plan years beginning on or after January 1, 2024, all qualified 401(k) plans must adhere to the new LTPT rules. Employers sponsoring 403(b) plans will need to comply for plan years beginning on or after January 1, 2025.
The new rule is not limited to plans that do not use the 1,000 hours of service standard for eligibility purposes; plans that utilize the elapsed time method are not exempt. Thus, a plan using a 12-month period of elapsed time for eligibility purposes must also be aware of which employees satisfy the LTPT requirements as they would be eligible to defer into the plan.
Do employers need to make contributions for LTPTs?
No. the LTPTs are not entitled to employer contributions. Until such time as they satisfy the plan’s requirements for participation, they are only eligible to defer into the plan. However, if the employer wants to do so it can and it does not have to be the same contribution as for others.
A plan can allow LTPTs to make Roth deferrals and/or catch-up contributions as well.
Do employers need to be concerned with vesting since LTPTs may only defer?
Yes! The Acts create a special vesting provision for LTPTs and Former LTPTs. Each year in which a LTPT or Former LTPT employee has at least 500 hours of service shall count as a year of vesting service. This vesting will apply to any employer contributions received during the employee’s time as a LTPT or Former LTPT.
How do LTPTs affect Coverage and Nondiscrimination Testing?
Plans may exclude all LTPTs for testing purposes. Former LTPTs, however, must be included in the normal testing group. Also, if a plan elects to use LTPTs for testing purposes, all LTPTs must be included.
Does the Plan Document need to be amended?
Yes, though not quite yet. The amendment deadline as set forth in the Acts is the last day of a plan’s 2025 plan year, though plans need to operate in compliance in the meantime. With the amount of guidance still needed from the IRS, it is possible that the deadline may be extended.
As we receive additional information and questions come up, we will add additional information to this page.
The Haslauer Group, Inc. is not a law firm and any information contained on this website does not, and is not intended to, constitute legal advice or create an attorney-client relationship. You should always consult legal counsel or a tax advisor before making decisions regarding your retirement plan.
