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ARA Urges IRS to Reduce Potential Burdens Regarding LTPT Employees

Advocacy

The American Retirement Association (ARA) has submitted a comment letter to the IRS about long-term, part-time (LTPT) employees. 

The Nov. 2 letter was in response to the IRS invitation in Notice 2020-68 regarding how to reduce potential administrative burdens related to counting years of service beginning before Jan. 1, 2021, for purposes of determining a LTPT employee’s nonforfeitable right to employer contributions under Section 112 of the SECURE Act.

Among the matters on which the IRS sought comment were ways to reduce plan sponsors’ administrative burdens when they implement the LTPT employee rules of Section 112 of the SECURE Act, particularly those concerning counting of vesting service for years before 2021. In response, the ARA writes that the “myriad rules applicable to counting vesting service are difficult for plan sponsors to navigate, and particularly difficult for small businesses that may not employ dedicated benefits personnel. The ability of plan sponsors to easily determine prior vesting service of LTPT employees is important in a sponsor’s decision to adopt and maintain a retirement plan.”

Recommendations 

Retaining Records. The ARA recommends that the IRS disregard years for which the plan sponsor is not otherwise required to retain records when counting years of vesting service for LTPT employees. 

The ARA explains: “This requirement will create a significant administrative burden for many plan sponsors unless the Service provides reasonable parameters regarding the counting of such service” and argues that “Because plan sponsors are not required to retain payroll records longer than seven years, they should not be required to retroactively credit service for LTPT employees prior to that date, if the information is no longer available, because of the otherwise significant administrative burdens that would arise.” It points out that the IRS “has allowed a disregard of prior hours in other situations. For example, the Service recently provided a fresh-start date in Notice 2018-95 which provided relief from the Once-In-Always-In rule for excluding part-time employees from making elective deferrals under a section 403(b) plan.”

Equivalency Method. The ARA suggests that the IRS allow plan sponsors to use the equivalency method of determining hours of service of LTPT employees in years before 2021, even if the terms of the plan otherwise use the actual-hours method. 

More specifically, the ARA requests that for years before 2021, the IRS allow plan sponsors to use the equivalency methods described in DOL Reg. 2530.200b-3, which include equivalencies based on working time, periods of employment and earnings—even if these equivalencies were not set forth in the plan document for such years. The ARA argues that “such a safe harbor would be a helpful compliance tool for plan sponsors whose plan documents did not explicitly provide for the use of equivalency methods for determining hours of service for LTPT employees during prior plan years, and who are now unable to retroactively determine hours of service for LTPT employees using the actual hours method.” 

However, says the ARA, when a plan sponsor chooses to use the equivalency method based on periods of employment for determining hours of service for a LTPT employee, the number of hours credited per unit of time under this equivalency method should be reduced by 50%.

Clarifications. The ARA suggests that the IRS clarify:

  • that the LTPT rules do not apply when the terms of the plan document allow employees to defer immediately; 
  • how the LTPT rules are applied if a plan is amended from immediate eligibility to a year of service (with a 1,000 hours); 
  • the application of the vesting rules for employees who move from part-time to full-time or vice versa; and
  • that plans may exclude LTPT employees as part of an excludable classification that is not based on service. 

Guidance Needed ASAP. The ARA also suggests that the IRS provide guidance on Section 112 of the SECURE Act “as soon as reasonably possible” so as “to allow plan sponsors and practitioners to timely collect records and update the systems necessary in order to accurately implement these provisions.” The ARA says that “Although the earliest the provision requiring LTPT employees be allowed to defer would apply is January 1, 2024, plan sponsors need guidance and certain relief more urgently.” This, it says, is because:  

  • To the extent LTPT vesting rules apply to individuals currently receiving contributions, immediate guidance would be helpful in avoiding plan administration errors in calculating vesting. 
  • The provision requires that hours of service be counted for eligibility beginning in 2021 and that vesting service be counted for years before 2021. It will take recordkeepers a significant amount of time to program their systems to handle these new rules,” the ARA says.
  • Many plan sponsors historically have not collected—or at least provided to the plan’s recordkeeper—hours of service for part-time employees, and they may be unable to obtain data earlier than a certain date, especially if payroll vendors have changed. 
  • Answers to outstanding questions and concerns may affect plan design decisions; for instance, they may affect decisions concerning eligibility and could affect how often a plan may need to be amended. 

Results of Adopting Recommendations

The ARA believes that these suggestions will: 

  • reduce the burdens on the plan sponsor related to counting years of service for LTPT employees before 2021; 
  • resolve significant issues relevant to a great many retirement plan sponsors and practitioners; 
  • provide plan sponsors the information they need to make decisions regarding plan design; 
  • promote sound tax administration by helping plan sponsors and practitioners to maintain retirement plans in compliance with Section 112 of the SECURE Act while still complying with the requirements of Code Sections 401(k)(15)(B)(iii) and 411(a)(4); and 
  • be easy for plan sponsors and practitioners to understand and apply.

Form 5500 Comments to Come

The ARA adds that it will be contacting the Department of Labor regarding a concern that the implementation of Section 112 of the SECURE Act will result in a higher participant count on the Form 5500. This, it says, could result in plans that otherwise would have been considered small plans to have large-plan filer status instead. That, the ARA warns, would impose increased costs associated with administration of a plan that must file Form 5500 as a large plan—and that “may discourage plan sponsors from choosing to adopt or continuing to maintain a retirement plan.” 

The ARA recommends “that the Form 5500 and related instructions be revised so that the determination of whether a plan is exempt from the annual audit requirement is based on the number of plan participants (including LTPT employees) with account balances as of the beginning of the plan year, rather than the total number of participants at the beginning of the plan year.”