The Setting Every Community Up for Retirement Enhancement Act (“SECURE 1.0”) and the revised rules in SECURE 2.0 have introduced a new mandatory eligibility requirement for certain retirement plans.
Effective 1/1/2024 some employees who may not otherwise be eligible to participate in the retirement plan will be eligible to make deferrals to the plan as a Long-Term Part-Time Employee. This is due to a mandatory provision of The SECURE Act of 2019.
SECURE 1.0 Introduces Long-Term Part-Time Employees for 401(k) plans
Effective for plan years beginning on or after 1/1/2024
Under the provisions of SECURE 1.0, a Long-Term Part-Time Employee (LTPT) is an employee who has worked 3 consecutive plan years with at least 500 hours of service in each year and is not otherwise eligible for the plan. At the time of SECURE 1.0’s passing, this provision only applied to 401(k) plans, therefore only 401(k) plans have the requirement for 2024.
- Service prior to 01/01/2021 is disregarded, for eligibility and for vesting
- Employees must be at least age 21 to be considered eligible under LTPT rules
- The plan can still exclude employees of a division or class of employee, so long as the classification is not based on hours or years of service
- Example – the plan excludes the New York branch from the plan. This will still be allowed as long as the plan passes coverage testing.
- LTPT employees must be given the opportunity to make deferrals. They are not required to receive employer contributions (this includes Safe Harbor employer contributions).
- LTPT employees receive a year of vesting each year in which they work at least 500 hours, regardless of the plan’s vesting requirements. If an LTPT employee meets the plan’s eligibility requirements, they continue to earn a year of vesting each year in which they work at least 500 hours.
- Collectively Bargained 401(k) plans are excluded
SECURE 2.0 Modifies the LTPT Provisions Introduced in SECURE 1.0
Effective for plan years beginning on or after 1/1/2025
SECURE 2.0 (passed 12/29/2022) reduced the requirement to 2 consecutive years of service beginning in 2025. It also clarified that service prior to 1/1/2021 is disregarded for eligibility and for vesting purposes for LTPT employees. Finally, the Act revised the original provision to include 403(b) plans that are subject to the Employee Retirement Income Security Act (ERISA), also beginning in 2025.
Additional guidance is needed from the IRS in terms of how this affects 403(b) plans. All 403(b) plans must follow the universal availability rule, which means that if any employees are eligible to make deferrals to the 403(b), then all employees must be eligible to make deferrals to the 403(b). In simple terms, universal availability means that 403(b)’s cannot have eligibility requirements for deferrals. Therefore, all employees would already be eligible to defer and the LTPT rules would not be needed. However, 403(b) plans are allowed to exclude certain classes of employees, such as those who normally work fewer than 20 hours per week, and it is possible employees in this class will need to be given the opportunity to defer into the plan if they meet the LTPT eligibility requirements.
Excluded Classes of Employees
Exclusions can be made as long as the classification is not based on hours or service. Therefore, excluding temporary workers who meet LTPT requirements would not be allowed, but excluding a division of the company or exclusion by title would be allowed. For example, if all employees in the New York office are excluded from the plan, all employees in the New York office would remain excluded, even if they meet the LTPT requirements.
Examples of the Application of LTPT Rules
Example Assumptions
- The plan year ends 12/31
- Eligibility requirements are age 21, 1 year of service with 1,000 hours and monthly entry
- The plan is not a collectively bargained 401(k) plan
Example 1 – An employee is hired 1/1/2021. They work 550 hours in 2021, 2022 & 2023. This employee is not eligible for the retirement plan because they have never worked 1,000 hours in a one-year period. However, they would be eligible as a LTPT employee because they had 3 consecutive years with at least 500 hours. They should be given the opportunity to defer to the plan beginning 1/1/2024.
Example 2 – Same facts as example 1, but instead of working 550 hours in each year, the employee only works 400 hours in 2022. In this case, the employee would not be eligible to defer 1/1/2024 because they did not have 3 consecutive years of 500 hours of service. If they worked 500 or more hours in 2024, they would have 2 consecutive years and then be eligible 1/1/2025 (SECURE 2.0 reduces the requirement from 3 years to 2 years, effective in 2025).
Example 3 – Consider a different employee with the same company. This employee was hired 1/1/2019. They worked 600 hours in 2019, 2020, & 2021, but then dropped to 200 hours in 2022 & 2023. This employee does have 3 consecutive years with at least 500 hours of service, but they would not be eligible as a LTPT employee because service prior to 1/1/2021 is disregarded.
Example 4 – An employee is hired in 2021 at age 16 and works 550 hours in 2021, 2022 & 2023. Although the employee has 3 consecutive years with at least 500 hours, they would not be eligible because they are not age 21. To be an LTPT employee, an employee must have attained age 21. Once the employee turns age 21, they would be an LTPT employee provided that they had three (two, per SECURE 2.0) consecutive years of at least 500 hours, one of which is the year in which they turn 21.