Long-Term, Part-Time Employees New Rules under the SECURE Act

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) generally requires that 401(k) plans allow long-term, part-time (LTPT) employees to become eligible to make elective deferrals (i.e., 401(k) contributions) upon completion of at least 500 hours of service during each of three consecutive 12-month periods. Under the new law, service prior to January 1, 2021 is not considered for this purpose. This means that any such employees will not be required to be eligible to make deferrals until the plan year beginning on January 1, 2024 (for calendar year plans).

Important Note:  The new rules do not have any impact on 401(k) plans that otherwise cover part-time employees or plans that provide immediate eligibility for all employees.

What rules apply to part-time employees currently?

First, as a matter of plan qualification, an employer cannot exclude a class of employees solely based on service, e.g., part-time employees. As a result, if a plan excludes part-time employees as a class, it must also include “fail safe” language providing that a part-time employee will nevertheless become eligible for the plan upon completion of a year of service (i.e., 1,000 hours during a 12-month period) and attainment of age 21. This is because basing a class exclusion on service could violate the minimum coverage standards under the Internal Revenue Code.

An employer may, however, exclude employees (including part-time employees) under some other reasonable classification that is not based on service, e.g., location, job title, etc.  In that case, the plan would have to be able satisfy the coverage rules annually taking into consideration the excluded class.

What are the new rules for part-time employees?

The purpose of the new rules is to expand coverage of part-time workers under 401(k) plans. As result, they address LTPT employees who work for the employer year after year, but less than 1,000 hours per year. Specifically, the new rules require that LTPT employees become eligible to make deferrals under the plan after satisfying the following requirements:

  • Completion of three consecutive 12-month periods with 500 or more hours of service in each of those 12-month periods, and
  • Attainment of age 21.

As mentioned above, service prior to January 1, 2021 is excluded for this purpose, so the first date a LTPT employee could become eligible to make deferrals under a calendar year 401(k) plan is January 1, 2024. The new rules generally apply to all LTPT employees except for employees who are covered under a collective bargaining agreement (i.e., union employees), and nonresident aliens with no U.S. source income.

When would a LTPT employee enter the plan after satisfying the maximum eligibility requirements?

A LTPT employee would generally become eligible to make 401(k) deferrals on the entry date provided for under the terms of the plan document for other eligible employees. For example, assume a plan allows eligible employees to enter the plan on the January 1 or July 1 coinciding with or next following the date an employee satisfies the eligibility conditions. In that case, a LTPT employee who is 21 (or older) and completed 500 (or more) hours of service during 2021, 2022 and 2023 would become eligible to make deferrals under the plan on January 1, 2024.

Does this mean LTPT’s have to receive employer contributions?

No. Under the new rules, the requirement is that a LTPT employee who has satisfied the maximum eligibility conditions must become eligible to make 401(k) elective deferrals. There is no requirement that they become eligible for employer contributions under the plan.

As a result, if LTPT employees are eligible to make deferrals under the plan solely because of the new requirements (e.g., the plan would not otherwise permit plan participation), the employer is not required to provide any employer contributions on behalf of such participants, including top-heavy minimum, gateway minimum, and safe harbor contributions (where applicable).

Are LTPT’s required to be included in testing?

No. If LTPT employees are eligible to make deferrals under the plan for no reason other than the new rules, they would be excluded from coverage and nondiscrimination testing, including ADP/ACP testing and general nondiscrimination testing.

Further, as discussed above, eligible LTPT employees would not be required to receive top-heavy minimum contributions (if applicable). Their balances would be included when determining the plan’s top-heavy ratio.

Important Note:  As mentioned previously, if the plan’s eligibility provisions are more liberal and LTPT employees are eligible for reasons other than the new rules, e.g., the plan has immediate eligibility, the exceptions to the testing and top-heavy rules would NOT apply, i.e., the part-time employees would be included in testing, required to receive top-heavy minimum contributions (if applicable), etc.

What happens if a LTPT employee works 1,000 (or more) hours during a plan year after becoming eligible to make deferrals under the plan?

If a LTPT employee completes a year of service (1,000 hours during a 12-month period), he or she will no longer be considered a LTPT employee effective as of the first day of the following plan year. The Employee would be treated in the same manner as a “regular” participant and included in testing, eligible to share in employer contributions (where applicable), etc.

What happens if a full-time employee changes to part-time status and would otherwise be considered a LTPT employee?

When a full-time employee changes to part-time status, their prior service cannot be disregarded. As a result, they would continue to remain eligible for the plan (in the same manner as they did prior to the change in employment status), unless they were excluded under some other classification in the plan document.

Are there special vesting rules that apply to LTPT employees?

Yes. If an employer provides employer contributions on behalf of LTPT employees who are eligible to make deferrals for no reason other than the new rules, special rules do apply. Under these rules, a LTPT employee must be credited for ALL years of service in which the employee completed 500 hours of service (the normal rule is 1,000 hours of service). The law does NOT exclude service prior to January 1, 2021 for this purpose.

Obviously, this has no impact on 401(k) elective deferrals (since they must be 100% vested). If an employer wants to avoid the special vesting rules all together, they could elect to only allow LTPT employees to make elective deferrals (i.e., not permit employer contributions), or they could elect to use more liberal eligibility provisions.

Could LTPT employees be excluded from the plan under some other classification?

This answer is not entirely clear; the IRS has not yet issued specific guidance. Currently, it would appear this would be permissible, provided the class exclusion is based on something other than service, e.g., all employees (full-time and part-time) in the Miami office are excluded from participation.

Are the LTPT employees counted as participants on the Form 5500 for purposes of determining whether a plan must file as a large or small plan filer?

This is unclear. Based the definition of a participant in the Form 5500 instructions, it would appear they will be counted for this purpose unless the Department of Labor provides an exception to the general rules. Given that the rules will not have an impact until the 2024 plan year, we are hopeful the DOL will issue guidance on this point shortly.

Do the new rules apply to 403(b) plans?

No. The new rules do not apply to 403(b) plans, as those plans generally cannot impose eligibility conditions on an employee’s ability to make elective deferrals (known as the “universal availability” rules).

If my company employs LTPT employees, are there any actions we should take now?

If you have long-term, part-time employees, you need to make sure you have good records in terms of their employment history and hours worked. Further, it would be advisable to review your plan’s current eligibility provisions with your third-party administrator and professional advisors to determine how the new rules may impact your plan. Changes to payroll providers or Human Resource systems may make it difficult to produce this history, so make sure to provide you third-party administrator with this information annually.

How can I learn more about the new rules?

Please contact EJReynolds, Inc. to learn more about these rules and how they may impact your plan and plan participants.

Important 401(k) Testing Deadlines to Remember!

Since most 401(k) plans have a calendar year plan year end, now is the best time to review testing deadlines for the upcoming Plan Year. In general, 401(k) plans must be tested annually to demonstrate that they do not discriminate in favor of highly compensated employees or provide benefits that exceed certain statutory or regulatory limits. If a plan “fails” any of the required tests, the plan sponsor must take corrective actions, and there are established deadlines for correcting certain failures.

The following is a brief summary of these deadlines:

  • March 15th – Deadline for issuing corrective distributions to correct ADP/ACP testing failures. Of course, this does not apply to Safe Harbor 401(k) plans, as those automatically satisfy the ADP/ACP testing.

In general, corrective distributions must be issued within 2 ½ months following the close of the plan year to avoid a 10% excise tax imposed on the excess amounts. Plan sponsors of 401(k) plans that include an automatic enrollment feature that satisfies certain requirements have up to 6 months to issue corrective distributions without incurring the excise tax.

In either situation, correct distributions must be issued no later than the last day of the plan year following the plan year in which the testing failure occurred to protect the qualified status of the plan.

  • April 15th – Due date for issuing corrective distributions for excess deferrals (i.e. participant deferrals made in excess of 402(g) limit –  $19,500 for 2021). If the excess amount, plus related earnings, is not distributed by this date, the participant is in effect taxed on the excess amount twice, both in the year the excess occurred and the year of the distribution. (Note: This deadline is the same, regardless of plan year).
  • June 30th – Extended due date for issuing corrective distributions for ADP/ACP testing failures under “eligible automatic contribution arrangement” 401(k) plans; the 10% excise tax applies to distributions made after this date.
  • October 15th – Deadline for adopting a retroactive plan amendment to correct a coverage or nondiscrimination testing failure (if applicable). The amendment must be adopted no later than 9 ½ months following the close of the plan year in which the failure occurred, as provided for under specific applicable regulations.
  • December 31st – Final deadline for issuing corrective distributions for ADP/ACP testing failures for the prior year (or for making a Qualified Non-Elective Contribution/Qualified Matching Contribution to correct the failure).

The deadlines 401(k) plan sponsors must observe are numerous and complex; the deadlines listed above are not meant to be comprehensive, but rather, represent critical dates related to the correction of specific plan testing failures.

Please contact our Plan Consultants to learn more about how these rules impact your plan and participants!