- September 4, 2024
Hopefully, everyone is now an expert on how to apply the “long term part-time employee” (“LTPT(s)”) provisions of the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act which became effective at the beginning of this year. Unfortunately, it is now time to “adjust” that knowledge in anticipation of certain impending changes to the LTPT rules. This is because, while the SECURE Act established the LTPT rules that became required for most plan sponsors on January 1, 2024, subsequent retirement plan legislation commonly referred to as “SECURE 2.0” modified and expanded the LTPT rules. This article discusses those changes to the LTPT rules as imposed by SECURE 2.0. Such changes generally are effective for most plan sponsors on January 1, 2025 so now is the time to take action in order to be prepared for the change.
The Initial LTPT Rule
As a quick refresher, the SECURE Act changed the service eligibility requirements as they apply to elective deferral contributions. More specifically, the SECURE Act required that employees with at least 500 hours of service in three consecutive 12-month periods be permitted to make elective deferrals under a 401(k) defined contribution plan. This change only applied to service eligibility provisions, as opposed to age eligibility provisions, and only impacted 401(k) defined contribution plans.
Plan sponsors are permitted to continue to restrict eligibility for employer funded contributions like a match or profit-share until employees satisfy a more restrictive “one year of service” requirement (1,000 hours within a 12-month period). In addition, the LTPTs who are allowed to defer into the plan generally are excluded from the nondiscrimination, minimum participation, top-heavy and coverage requirements that might otherwise apply. Therefore, the ability of the LTPTs to defer as a result of this exception doesn’t hurt the plan sponsor due to any otherwise applicable mandatory compliance testing requirement.
SECURE 2.0 Changes LTPT Eligibility Requirement
As mentioned above, SECURE 2.0 changed the LTPT eligibility provisions. In this regard, SECURE 2.0 reduced the three-year period during which an employee accrued at least 500 hours of service to a two-year period during which an employee accrued at least 500 hours of service. This rule change goes into effect for plan years beginning after December 31, 2024. Therefore, the earliest that an LTPT must be allowed to defer to a 401k plan under the revised SECURE 2.0 rule is January 1, 2025.
SECURE 2.0 also further extended the application of the LTPT rules to 403(b) plans. However, 403(b) plans were already subject to the “universal availability” requirement meaning that, in general, 403(b) plan sponsors already had to offer the ability to defer to their employees without imposing any service eligibility restrictions whatsoever. Thus, the extension of the LTPT rules to 403(b) plans likely has little practical impact on most 403(b) plans eligibility provisions.
One notable exception to this generalization is the previously permitted excluded classification of employee under 403(b) relating to individuals who normally worked fewer than 20 hours per week. The extension of the LTPT rules to 403(b) plans effectively ends the availability of this exclusion in connection with the eligibility to make deferrals.
It remains unclear what if any impact the extension of the LTPT rules to 403(b) plans may have on any other employee classification exclusions such as the exclusion for students. Additional guidance from the IRS to clarify this issue is welcome and necessary before these issues can definitively be resolved.
We hope that this article helped you to better understand this topic and encouraged plan sponsors to operate their plans in compliance with the new law. However, this article is not intended to serve as financial, tax or legal advice so it should not be construed as such. If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.