IRS Issues Guidance Regarding Long-Term, Part-Time Employees: As background, the so-called SECURE 1.0 Act provided that if a part-time employee who is at least 21 completes at least 500 hours of service for three consecutive years, then he or she must be allowed to make elective deferrals to his or her employer’s 401(k) plan. The earliest entry date for such employees was January 1, 2024. In addition, under the SECURE 2.0 Act, if a part-time employee who is at least 21 completes at least 500 hours of service for two consecutive years, then he or she must be allowed to make elective deferrals to his or her employer’s 401(k) plan or 403(b) plan. The earliest entry date for such employees will be January 1, 2025.
On November 24, 2023, the IRS published proposed regulations addressing those long-term, part-time (“LTPT”) employee provisions.
To answer a major question that many practitioners had about the SECURE 1.0 and the SECURE 2.0 LTPT employee rules, the proposed regulations provide that those rules generally do not preclude a plan from establishing an eligibility condition that must be satisfied in order for an employee to participate, such as requiring as a condition of participation that an employee be employed within a specified job classification. However, any such condition cannot be a proxy for imposing an age or service requirement that requires an employee to complete a period of service with the employer or employers maintaining the plan that extends beyond the entry date provisions described below. (A plan provision will be treated as a proxy for imposing an age or service requirement if the provision has the effect of imposing an age or service requirement with the employer or employers maintaining the plan.) The proposed regulations provide the following example in this regard:
- Employer S maintains Plan B. Employer S is comprised of Divisions T and U. In order to be employed in Division T, an employee must be classified as a full-time employee, which Employer S defines as an employee who completes a 12-month period during which the employee is credited with at least 1,000 hours of service. All other employees of Employer S are employed in Division U. Effective January 1, 2024, Plan B provides that, as a condition to participate, an employee must be employed in Division T. The IRS concludes that because the provision of Plan B requiring an employee to be employed in Division T in order to participate in the plan has the effect of requiring an employee to complete at least 1,000 hours of service, that provision is treated as a service requirement under these proposed regulations. As a result, as of January 1, 2024, Plan B fails to satisfy the LTPT employee rules because the plan requires an employee to complete a period of service with Employer S that extends beyond the eligibility requirements discussed above.
Also according to the proposed regulations:
- A LTPT employee does not include certain union employees or certain nonresident alien employees. Thus, they can continue to be excluded from a plan, irrespective of the number of hours of service that they complete.
- A LTPT employee who satisfies the plan’s eligibility conditions (as described in my first paragraph above) must become eligible to make elective deferrals by the earlier of: (1) the first day of the first plan year beginning after the date on which the employee satisfied the above-referenced eligibility and entry date requirements; or (2) the date 6 months after the date on which the employee satisfied those requirements.
- Except for any 12-month period beginning before January 1, 2021, all 12-month periods during which a LTPT employee is credited with at least 500 hours of service with the employer or employers maintaining the plan must be taken into account for purposes of determining whether an employee has satisfied the above-referenced eligibility and entry date requirements.
- As for determining the vesting status of a LTPT employee: (a) each 12-month period during which the employee is credited with at least 500 hours of service with the employer or employers maintaining the plan is treated as a year of vesting service; and (b) except for any 12-month period beginning before January 1, 2021, all 12-month periods of service with the employer or employers maintaining the plan must be taken into account unless the period of service of the employee may be disregarded under Code section 411(a) (e.g., years of service completed before age 18).
- Neither nonelective nor matching contributions must be made on behalf of LTPT employees, even if those contributions are made on behalf of other eligible employees.
- An employer can elect to exclude LTPT employees for purposes of determining whether the plan satisfies the following Code provisions: nondiscrimination requirements, ADP and ACP tests, the ADP and ACP safe harbor provisions, and the minimum coverage requirements.
These regulations, which are proposed to be effective as of the 2024 plan year, include numerous examples to help plan sponsors and their advisors address a wide array of potential factual scenarios. Also note that before final regulations are issued, taxpayers may rely on the rules set forth in these proposed regulations.
As a practical matter, given the complexity involved with implementing these LTPT employee rules, many employers may decide to treat part-time employees and full-time employees the same way and impose an eligibility service period of less than 500 hours. Alternatively, many employers that use an hours-based requirement for eligibility may consider switching to the elapsed time method for determining eligibility. (These LTPT employee rules do not apply to plans that use the elapsed time method for determining eligibility.) Those approaches would arguably maximize employers’ protection from compliance issues in this area.