On November 27, 2023, the IRS published proposed regulations clarifying the rules for long‑term, part-time employees (“LTPT employees”).
The new rules — long-awaited since enactment of the SECURE Act in December 2019 — explain the eligibility and vesting requirements applicable to 401(k) plans for LTPT employees. Specifically, the proposed regulations:
- Define the term “LTPT employee.”
- Clarify when LTPT employees must be permitted to make salary deferrals to a 401(k) plan (and what eligibility exclusions are permitted).
- Provide special vesting rules for employer contributions made on behalf of LTPT employees.
- Describe special rules for “former LTPT employees.”
- Specify the available nondiscrimination testing and coverage elections.
Background
SECURE Act Changes
Before the SECURE Act, the maximum service requirements for eligibility and vesting for a 401(k) plan were completion of 1,000 hours of service during a 12-month period and age 21. The SECURE Act added new eligibility and vesting requirements for LTPT employees.
Under the new eligibility rules, the maximum eligibility requirements for LTPT employees are completion of more than 500 hours of service during three consecutive 12‑month periods and age 21. Any 12-month periods beginning before January 1, 2021, are not counted (so the LTPT employee rules do not apply until plan years beginning on or after January 1, 2024).
Under the new vesting rules, LTPT employees must be credited with a year of vesting service for each 12-month period during which the employee is credited with at least 500 hours of service. The SECURE Act did not exclude 12-month periods before January 1, 2021, for vesting purposes.
SECURE Act 2.0 Changes
SECURE Act 2.0 made the following changes to the SECURE Act, effective for plan years beginning after December 31, 2024:
- 403(b) plans became subject to the LTPT employee requirements.
- The three consecutive years of service requirement for eligibility was reduced to two consecutive years of service.
- The exclusion of service before January 1, 2021, was amended to make it apply to both eligibility and vesting service.
Proposed Regulations
Applicability Date
Although the LTPT employee regulations are proposed, employers may rely on them beginning January 1, 2024.
LTPT Employee Defined
Under the proposed regulations, an LTPT employee is a participant who is eligible to make elective deferrals solely because they have completed 500 hours of service during the required number of consecutive 12-month periods (three years beginning in 2024 and two years beginning in 2025). An employee who becomes eligible for any other reason is not considered an LTPT employee.
For example, an employee who is immediately eligible to participate would not be an LTPT and the LTPT employee vesting rules would not apply (regardless of whether the employee also completes, before or after becoming eligible to participate, one or more 12-month periods with at least 500 (but less than 1,000) hours of service).
The proposed regulations also clarify that LTPT employees do not include: (1) employees covered by a collective bargaining agreement or (2) employees who are nonresident aliens with no U.S. earned income.
Government and Church Plans
The proposed regulations indicate there is no exception from the LTPT employee rules for government or church plans. The IRS has specifically requested comments on the application of the LTPT employee rules with respect to these plans.
Service Counting Methods for Eligibility
The proposed regulations allow a plan to use one of the equivalency methods for counting service, but not the elapsed time method.
Equivalency Method
As an alternative to counting actual hours of service, a plan may credit hours of service using an equivalency method. The applicable equivalency method must be set forth in the plan document. For example, a plan may determine the number of hours of service to be credited on the basis of weeks of employment if an employee is credited with 45 hours of service for each week in which the employee is credited with at least one hour of service. Under this method, the hours of service credited for each week are not affected by the employee’s job classification as either part-time or full-time.
Because the equivalency method results in the employee being credited with hours of service, the proposed regulations permit it to be used in lieu of actual hours counting to determine that an employee is credited with at least 500 hours during a 12-month period.
Elapsed Time Method
Under the elapsed time method, an employee’s eligibility to participate is not based on completing an actual number of hours of service during a 12-month period; an employee is deemed to have a year of service as of the anniversary of their hire date. As a result, a participant who becomes eligible using the elapsed time method does not become eligible solely because they have completed 500 hours of service during the required number of consecutive 12‑month periods (and therefore would not be an LTPT employee).
Participation
Entry Date
The latest permissible entry date for LTPT employees is the earlier of:
- The first day of the plan year beginning after the LTPT employee requirements are met or
- The date six months after the LTPT employee requirements are met.
Rehired Employees
If an employee who satisfies the LTPT employee requirements separates from service before their entry date and is subsequently rehired, they will be eligible to participant in the plan immediately on their rehire date.
Similarly, if a former LTPT employee who was a participant is rehired, they will be eligible to again participate in the plan as an LTPT employee on rehire.
Eligibility Conditions May Not Be Based on Age or Service
The LTPT employee regulations allow class exclusions. Therefore, a plan may exclude groups of employees, such as employees in certain job classifications or at specified work locations. However, the exclusions cannot be a proxy for imposing an age or service requirement.
For example, an employer may not put all full-time employees in one company and all part-time employees in another company and then only allow the company with full-time employees to participate in the plan. Similarly, an employer cannot exclude part-time or seasonal employees as a job classification once they satisfy the LTPT employee requirements.
If an employee who would otherwise be eligible to participate as an LTPT employee is excluded because they are employed in an ineligible job classification (for example, student intern) and such employee then changes to an eligible job classification (for example, part‑time), the employee must become eligible to make salary deferrals on the date of the job classification change.
Determination of 12-Month Periods
Except for any 12-month period beginning before January 1, 2021, all 12-month periods during which an employee is credited with 500 hours of service must be considered for purposes of determining whether the LTPT employee requirements have been met, including any 12‑month periods of employment in an ineligible job classification.
The initial 12-month period for determining eligibility to participate as an LTPT employee must be based on the employee’s date of hire. However, the plan’s terms may provide that, beginning with the plan year that commences within the initial 12-month period, subsequent 12-month periods are based on the plan year. If the eligibility service determination switches to the plan year, there may be overlap between the initial 12-month period and the second 12-month period, resulting in an earlier entry date.
If an employee who is not yet eligible to participate has a 12-month period with fewer than 500 hours of service, any prior 12‑month periods during which the employee completed at least 500 (but less than 1,000) hours of service are not counted towards satisfying the LTPT employee requirements. In other words, the eligibility period would start over again.
However, once an employee becomes eligible to participate as an LTPT employee, they will remain eligible to participate and make salary deferrals even if they later complete one or more 12-month periods with fewer than 500 hours of service.
Vesting in Employer Contributions
Employers are not required to make nonelective or matching contributions for LTPT employees, even if those contributions are made to other eligible employees. But if an employer decides to voluntarily provide such contributions to LTPT employees, the proposed regulations provide special vesting rules for these contributions.
LTPT employees (and former LTPT employees, as described below) must be credited with a year of vesting service for each 12‑month period during which the employee has at least 500 hours of service, except for (1) any 12‑month period beginning before January 1, 2021, and (2) any periods of service that are permitted to be excluded if specified in the plan (e.g., years of service before age 18).
Former LTPT Employees
An LTPT employee who has already entered the plan becomes a former LTPT employee as of the first day of the first plan year beginning after the earlier of the plan year in which the employee:
- Completes 1,000 hours of service in a year or
- Moves to an ineligible classification.
However, a former LTPT employee continues be credited with a year of vesting service for any years during which they are credited with at least 500 hours of service. This results in former LTPT employees being treated more favorably than other eligible full-time employees who will have to work at least 1,000 hours to earn a year of vesting service.
An LTPT employee who becomes a former LTPT employee by reason of changing to an ineligible classification during a plan year generally will return to LTPT employee status as of the first day of the plan year following the return to an eligible classification. However, a former LTPT employee will not return to LTPT employee status if the employee is a former LTPT employee by reason of having completed 1,000 hours of service during a plan year. Such an employee never again becomes an LTPT employee.
Safe Harbor Contributions
A safe harbor plan that does not provide harbor matching or nonelective contributions to LTPT employees will not fail the safe harbor requirements if:
- The plan’s terms clearly indicate that LTPT employees are excluded for purposes of the safe harbor provisions.
- The plan amendment adding the safe harbor exclusion for LTPT employees is adopted before the first day of a plan year and remains in effect for the entire 12-month plan year. Note: No amendments are required until the end of 2025.
Employer Elections for Nondiscrimination and Coverage
The regulations allow an employer to elect whether to include or exclude LTPT employees for determining if the following requirements are met:
- Nondiscrimination requirements.
- Actual deferral percentage (ADP) test.
- Actual contribution percentage (ACP) test.
- Safe harbor provisions.
- Minimum coverage requirements.
- Top-heavy vesting and benefit requirements (but not for determining whether a plan is top-heavy).
An election to include or exclude LTPT employees from the nondiscrimination and coverage rules must be applied uniformly. This means the employer cannot disregard LTPT employees for some, but not all, of the nondiscrimination and coverage requirements.
Immediate Considerations
Exclusions by Classification
Although the LTPT employee regulations allow class exclusions, such eligibility conditions cannot be a proxy for imposing an age or service requirement. This means the exclusion cannot be based solely on service; there must be a basis for the exclusion other than service. The determination of whether an excluded category is based solely on service will be fact dependent. Any exclusion that looks like it could be service based needs to be reviewed with legal counsel as soon as possible.
The following is a list of some, but not all, potentially problematic class exclusions:
- Temporary employees.
- Seasonal employees.
- Contingent employees.
- Summer help.
- Substitutes.
Failure to timely enroll eligible LTPT employees will result in an operational failure that will require corrective employer contributions, including lost earnings, to the accounts of all affected employees.
Possible Plan Design Changes
If an employer wants to avoid having to comply with the LTPT employee rules, it should consider changing to immediate eligibility for salary deferrals for all employees. Matching and nonelective contributions could continue to be subject to an eligibility requirement.
Plans with an elapsed time-based year of service eligibility requirement also are not subject to the LTPT employee rules.
Recordkeeper System Issues
Because these regulations were issued only 25 days before they are effective, most if not all recordkeepers may not be able to fully comply by January 1, 2024. Therefore, employers should immediately contact their recordkeeper to determine the steps that have or will be taken to ensure compliance with these regulations.
Questions
If you have questions about the new LTPT employee regulations, please contact a member of Warner’s Employee Benefits Practice Group or your Warner attorney.
