Unpacking the acronym and new retirement plan legislation
“What we need are some more retirement plan acronyms” – said no one ever. BUT, they’re here to stay, because long-term part-time (LTPT) employees is a mouthful. So, why is this acronym popping up now and why are we talking about LTPT employees? The SECURE Act and SECURE 2.0 have changed the retirement plan eligibility rules for these types of employees. This, therefore, affects plan sponsors across the country. Let’s take a look at this legislation, new guidance, and what it means for employees and employers.
The deets: what actually changed for long-term part-time employees
The SECURE Act included a new rule that will dramatically affect eligibility for 401(k) plans. Additionally, SECURE 2.0 modified this rule. Under the original rule, beginning in 2024, any eligible employee who worked at least 500 hours in three consecutive years (starting in 2021) must be permitted to make 401(k) salary deferral contributions into the plan. This will change in 2025, requiring only two consecutive years where at least 500 hours was worked.
Currently, a 401(k) plan can restrict eligibility to defer to those who worked at least 1,000 hours in a 12-month period. The new rule changes this. Of course, if the plan eligibility provisions do not currently require more than 500 hours, this is a moot point.
More deets: breaking it down
This provision only affects eligibility to make 401(k) salary deferral contributions into the plan. The employer is not required to provide employer contributions to this group. These long-term part-time employees are also not included in compliance testing. As a result, the new rule will not negatively impact testing or require additional cost in the form of employer contributions. This changes if an LTPT employee meets the plan’s regular eligibility requirements and is no longer in the plan solely under the special LTPT provision. At that point, the employee would be treated just like any other plan participant.
The employer may include these employees in employer contributions, even though this isn’t a requirement. If employer contributions given are subject to a vesting schedule, the LTPT employees must accrue a year of vesting service for each year during which at least 500 hours are worked. Only years after 2020 will count for determining years of vesting service. The reduced requirement for vesting will only apply if employees have entered the plan solely under the LTPT employee provision. If a plan already allows part-time employees into the plan, the normal plan vesting rules apply.
If the plan has a class exclusion, unrelated to service, employees can be excluded from the plan even if they would otherwise meet the LTPT definition. For example, if the plan excludes employees in a particular job classification or location and the coverage testing rules are satisfied, that exclusion will override this new rule. However, if part-time or seasonal employees are excluded until they work 1,000 hours in an eligibility computation period, this exclusion will no longer apply to them once they meet the definition of an LTPT employee.
One big question following the original legislation was how this will impact the participant count for Form 5500 purposes. The DOL just recently issued long-awaited guidance on this. It states that only participants with an account balance (rather than all eligible employees) will count for 5500 purposes beginning with the 2023 plan year reporting. So, although LTPT employees will count once they contribute, they won’t be counted just because they are eligible.
A provision in SECURE 2.0 added the LTPT rule to ERISA 403(b) plans beginning in 2025. Eligibility in a 403(b) plan will be based on service in 2023 and later years. Based on the language added to ERISA and IRC Sec. 403(b)(12)(D), it seems clear that this will override the ability to exclude LTPT employees with the class exclusions of student employees or employees who normally work fewer than 20 hour per week.