The new long-time, part-time employee classification created by the SECURE Act was the focus of a workshop session at the 2021 ASPPA Annual Conference led by ERISA Attorney Craig Hoffman.
As part of an effort to help long-time, part-time employees save for retirement, the SECURE Act included a provision requiring 401(k) plans to adopt a new, dual-eligibility requirement under which an employee must complete either one year of service subject to the 1,000-hour rule or three consecutive years of service with at least 500 hours of service. The plan sponsor may choose to exclude employees who are eligible solely on the basis of this new three-year rule from the top-heavy, coverage and nondiscrimination rules.
It appears that 2024 is the earliest that employees will gain eligibility under the three-year rule, so plan sponsors and their recordkeepers need to begin tracking LTPT employee data this year. What are the ramifications for TPAs in 2021 and beyond? Hoffman, an Attorney/Senior Consultant at Nova 401(k) Associates, addressed several concerns about the new rule and warned of possible legislative changes to it in the future.
Lack of Guidance
While IRS Notice 2020-68 provides very limited guidance on the new LTPT requirements, much more guidance is needed. “We need guidance very badly dealing with a lot of the issues” in the LTPT rules, Hoffman observed.
For example, existing regulations permit the use of a “periods of employment” equivalency method for crediting service for vesting and eligibility purposes. “Will plans be able to use this method for vesting service for periods before 2021 if it’s not already in the plan document?” Hoffman asked. “Will the equivalency amounts be reduced by 50% since they are being applied under a 500-hour standard?”
(Note that in May, the ARA called for the IRS to issue guidance on the LTPT rule.)
Church and Governmental Plans
“How would the rules apply to church plans and grandfathered governmental 401(k) plans, which there are a few of out there?” Hoffman asked.
Form 5500 Reporting
Are LTPT employees going to have to count for purposes of whether a plan can can qualify for the small plan audit waiver that’s generally available to plans with 100 or fewer participants? “I don’t see any way around the fact that these long-term part-time employees will go into your 5500 cap, and that will be based upon the active participants under the current rules for 5500s—those who have an account balance, or are currently eligible,” Hoffman said.
Noting that the DOL interprets “currently eligible” to include anybody who’s eligible to make an election contribution irrespective of whether they have ever made one, Hoffman observed that “you may find plans going over the 100-employee threshold and finding themselves subject to a $10,000 or $15,000 audit. Not a good idea.”
However, “we actually do have some good news from the Department of Labor,” he added. “About four weeks ago, they proposed some modifications to the Form 5500. Those rules include a provision to change the rules for determining who is an active participant for the 5500 small plan audit waiver, so that if you’re eligible but do not have an account balance, you will not count toward the 100-lives threshold. Now, if you’re a long-term part-time employee and you’ve put money in the plan, you’re going to count, but for those who don’t put anything in, you will not have to count them.”
To their credit, Hoffman noted, the DOL proposed related changes back in 2016. “They had a very detailed slate of changes to modernize the Form 5500. But that initiative was in a deep freeze during the last administration.” But now, based upon the preamble to the proposed Form 5500 changes, “the IRS, DOL and PBGC are planning to come back to that proposal. In the meantime they made this change,” he said. “The DOL specifically acknowledged in the preamble that they were doing this because of the upcoming increase in participants with no account balance as a result of the LTPT employee rule.” Look for the DOL to issue the final revision next spring, Hoffman advised.
Lower or No Service Requirement
As an alternative to following the LTPT rules (and assuming the plan is not top-heavy or likely to become so), plan administrators “may want to also consider a design change letting people in right now to avoid the rules entirely,” Hoffman noted. “If you let everyone in on 1/1/2024 irrespective of long-term part-time status, that would satisfy that rule, that you don’t have anybody in there solely by virtue of that.” The IRS needs to address this issue, he added.
Legislative Changes Coming?
There is a chance that the LTPT rule deadlines might be moved up by the SECURE 2.0 legislation pending in Congress, Hoffman pointed out. “That bill would shorten the eligibility look-back provision from three years to two years with at least 500 hours of service and push back the plan amendment deadline to the end of the 2023 plan year—meaning you may have people coming in as early as 1/1/2023,” he said.
“Lastly, in this same vein, look out for the pending budget reconciliation,” Hoffman added. “The Automatic Retirement Plan Act included right now in budget reconciliation would require every employer with five or more employees to have a payroll deduction savings arrangement, either 401(k) plan or IRA, 403(b), or IRA payroll deduction program with automatic enrollment and automatic escalation—and it’s for everybody.”
If that legislation is enacted, Hoffman noted, the LTPT employee rules would become obsolete. However, he added, “the proposal may be dropped entirely from reconciliation because it, along with the increased tax credit, was scored at costing $44 billion in forgone tax revenue. And if they’re trying to lower that number, that may be one of the casualties.”
Notwithstanding all the uncertainty and dearth of guidance, for the moment, plan administrators still need to operate with the SECURE Act’s new LTPT rules in mind, Hoffman noted, and plans must be amended to reflect the rules by the end of the 2022 plan year.
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