Recent changes: retirement plan eligibility for long-term part-time employees
The SECURE 1.0 Act, passed in 2019, redefined several retirement plan rules, including the eligibility of long-term part-time (LTPT) employees in 401(k) plans. Then, in 2022, the SECURE 2.0 Act further expanded on these initial changes. Each Act, while sharing a name and the common goal of enhancing retirement savings opportunities, has distinct requirements and timelines.
The overlapping timelines and subtle differences between the two SECURE Acts have left many employers wondering which rules apply and when. In this article, we’ll demystify the rules and deadlines related to LTPT employees because some of these rules are now applicable.
LTPT changes in effect for 2024
In the past, employers had the discretion to exclude employees from employer-sponsored retirement plans if the employee worked less than 1,000 hours in 12 months. However, the SECURE 1.0 Act changed that rule to be more inclusive of LTPT employees.
As of January 1, 2024, certain LTPT employees may become eligible to participate in employer-sponsored 401(k) plans. To qualify, the employee must:
Be at least 21 years old,
Have completed at least 500 hours of service for three consecutive 12-month periods.
The tracking of the required 12-month periods started on January 1, 2021. As a result, January 1, 2024, was the earliest point at which these employees could qualify for plan participation.
Enrollment
Under the new rules, when LTPT employees become eligible for a 401(k) plan, they must be allowed to enroll either on the first day of the plan year following their eligibility or within six months from the time they meet the eligibility criteria, depending on which occurs first.
For example, if an LTPT employee becomes eligible on June 30, 2024, and the employer’s 401(k) plan year started January 1, 2024, the employee would be eligible to enroll on January 1, 2025 – the first day of the plan year following the date they met the eligibility requirements.
However, if the LTPT employee becomes eligible on June 30, 2024, but the plan year for the employer’s 401(k) starts on July 1, the six-month mark after meeting eligibility would be December 30, 2024. Since this date falls before the start of the next plan year, the employee would be eligible to enroll in December instead of waiting until the start of the next plan year.
Vesting and matching
In terms of vesting, the calculation starts in 2021. For this purpose, each year the employee completes at least 500 hours of service after 2021 counts. Service before 2021 is only considered for vesting purposes if the employee completes at least 1,000 years of service in those years.
Employers are not required to make matching contributions for LTPT employees, but they have the discretion to include them if they choose. LTPT employees can also be excluded from nondiscrimination and coverage testing.
Future Changes
The eligibility criteria for LTPT employees will change again in 2025. To qualify, employees will only need to complete two consecutive 12-month periods with a minimum of 500 hours of service in each period.
Also, in 2025, employers must make 403(b) plans available to LTPT employees who qualify. The eligibility criteria will be the same as 401(k) plans.
When determining eligibility, service periods prior to January 1, 2023, won’t be considered. While specific guidance for the changes to 403(b) plans has yet to be released, it’s anticipated that the IRS will provide detailed guidance before this rule becomes effective in 2025.
Recommended steps for employers
Employers should ensure that their plan documents, operations, and employee tracking systems are updated to comply with these new rules. This includes determining the need for a system to track employee hours and vesting periods, reviewing service provider agreements, and consulting with advisors to ensure all changes are implemented effectively.
This article is intended to provide a brief overview of retirement plan changes for long-term part-time employees. If you would like to learn more about relevant SECURE Act regulations and ensure compliance with provisions pertaining to your business, please contact our office for personalized advice.
