A Look at the New Long-Term Part-Time Employees Rules

The SECURE Act is about to celebrate its second birthday, and the changes it made are still the subject of active discussion. Among them are the provisions that concern long-term part-time (LTPT) employees, which ushered in new treatment regarding their eligibility to participate in an employer’s retirement plan. 

In a Dec. 7, 2021 session of the ASPPA Winter Symposium, Stephen W. Forbes, an ERISA attorney with Forbes Retirement Plan Consulting, discussed these provisions and their application. 

“The hope is that these individuals will be able to participate in the employer’s 401(k),” said Forbes of the provision, which he called “one of the more significant SECURE Act provisions.” 

Forbes said that except in the case of collectively bargained plans, the provision will require employers maintaining a 401(k) plan to have a dual eligibility requirement, and that an employee must be treated as satisfying the plan’s eligibility service requirement on the earlier of completing either: (1) one year of service requirement (with the 1,000-hour rule); or (2) three consecutive years of service in which the employee completes at least 500 hours of service. The rule is effective for plan years beginning after 2020.

Eligibility Rules

Forbes offered a summary of the eligibility rules for LTPT employees under the SECURE Act, which include:  

• Age. The LTPT employee must satisfy the plan’s age requirement 
• Entry dates. In applying the new LTPT employee provision, the plan may apply plan entry date provisions (e.g., semi-annual entry dates). 
• Service periods. In applying the LTPT requirements, the plan the uses the service periods (12-month periods) in the same manner as it determines years of service. A plan may use anniversaries of the employment commencement date or may switch to the plan year. 
• Crediting service. A plan doesn’t have to begin crediting eligible service until 2021; the first entry would be in 2024.

Employer Nonelective and Matching Contributions 

Forbes noted that the new LTPT employee rule only requires the plan to make elective deferrals available to such employees. The plan does not need to provide employer nonelective or matching contributions for the LTPT employees; however, an employer may provide employer contributions to LTPT employees.

Nondiscrimination Testing 

The LTPT provision has implications for nondiscrimination testing, Forbes said. These include: 

• Exclusion of LTPT employees. In the case of employees who are eligible solely by reason of the new rule (500 hours of service in three consecutive years), the employer may elect to exclude such employees from coverage and nondiscrimination testing, including the ADP and ACP tests. If the employer elects to provide employer nonelective or matching contributions to LTPT employees, the employer may elect to exclude such employees from nondiscrimination and testing. 
• Cross-testing plans. An employer may find that providing nonelective contributions to LTPT employees and including them in the nondiscrimination testing may be beneficial, Forbes said, adding that employers have the option to include the LTPT employees.

Top Heavy Rules

Employees who are eligible to participate in the plan solely because of the new LTPT provision are excluded from the vesting and benefit provisions of the top heavy rules, Forbes said. Such employees also are not included in determining whether the plan is top heavy, he noted.

Vesting 

The way the provisions affect vesting “are probably the most controversial part of the new rule,” Forbes remarked, adding that it also is “probably the most burdensome.” Finer details include: 

• Vesting years of service. If the LTPT employee receives an employer contribution, the plan will treat each 12-month period for which the employee has at least 500 hours of service (HOS) as a vesting year of service (YOS). 
• Break-in-service rules. The plan will apply the break-in-service rules by substituting at least 500 hours of service for more than 500 hours of service. 
• Crediting vesting YOS. Unless an exception exists (e.g., disregarding YOS before age 18), a LTPT employee will receive credit for all service, including service before Jan. 1, 2021 for purposes of vesting. This means the plan administrator would have to go back through the employee’s entire work history to see if he or she had years in the past when they completed at least 500 HOS.

These special vesting rules only apply to employees who are eligible to participate “solely by reason” of the LTPT requirements. Other employees will continue to be credited with a year of vesting only for years in which they completed at least 1,000 hours of service

Employees Who Become Full-Time Employees 

The new LTPT employee provision will cease to apply (with the exception of the vesting provision) to any employee as of the first plan year beginning after the plan year in which the employee meets the plan’s normal eligibility requirements, Forbes noted. 
Some plans, Forbes noted, allow employees to participate in the elective deferral portion of the plan earlier than what would be required by the LTPT employee requirements. For example, what if an employer allows all employees to make elective deferrals beginning with the month following the month in which hired? 

This design, apparently, would avoid the need to apply the new LTPT rules because all employees would be eligible to participate long before being required to do so under the LTPT employee rules, Forbes said. He added that:

• the plan would not need to retroactively credit vesting service under the 500- hour standard; 
• the LTPT disaggregation rules would also not apply; and 
• the plan could still test using the normal disaggregation rules (i.e., disaggregate those with less than a year of service and attainment of age 21).

More to Come 

Forbes said that more Department of Labor guidance on the LTPT provisions of the SECURE Act is “certain,” adding that more IRS guidance will be needed to confirm whether the top-heavy minimum contribution requirements will now apply.