Employer-sponsored retirement plans have always been able to prevent so-called “part-time” employees from participating. 401(k) plans can require that an employee must work 1,000 hours in a year to be eligible. 403(b) plans can exclude employees who normally work less than 20 hours per week. While these exclusions have historically served to streamline plan administration by keeping retirement benefits just for those who work “full-time”, they fail to accommodate employees who may be utilizing modern work arrangements.
In the post-COVID world, a person’s long-term career plan often includes multiple part-time positions, or one part-time job with “gigs” on the side. The advent of working at home as a standard certainly enables such a scenario. Under the current eligibility rules, if an employee fails to regularly work 20+ hours per week for one company, they could go their entire career without the ability to contribute to a 401(k) or 403(b) plan. In response to this social need, the government passed two laws that increase access for part-time employees to workplace retirement plans. The first of these laws goes into effect in 2024, so listen up!
The SECURE Act of 2019 started the ball rolling by requiring that 401(k) plans allow employees who work at least 500 hours per year for three consecutive years be eligible to participate in the salary deferral portion of the plan. Employees qualifying under these standards are called Long-Term, Part-Time employees, or “LTPTs”. Service for this purpose is excluded prior to January 1, 2021, so the first time an LTPT would be able to enter under these provisions is January 1, 2024. This assumes they worked at least 500 hours in 2021, 2022 and 2023.
The application of vesting may also be a challenge with LTPTs. Under the new rules, a person who has entered the plan under the LTPT provisions and is receiving employer contributions must have years of service for vesting credited for years with 500 or more hours. The law allows 1,000 hours as the threshold for all other employees. Therefore, a plan that provides employer contributions to LTPTs will need a separate vesting service tracking process. Luckily, the law allows service prior to January 1, 2021 to be excluded for vesting purposes, so it isn’t necessary to go back and review all historical years.
The SECURE 2.0 legislation passed in 2022 amended and expanded the LTPT provisions from the original SECURE Act before they even took effect! Most notably, it changed the LTPT requirements for plan years starting after December 31, 2024 to require eligibility for employees that work 500 or more hours in two consecutive years (not three), but excludes years prior to January 1, 2023. It also expanded the LTPT rules to include ERISA-covered 403(b) plans, which would be all 403(b)s except those maintained by a governmental entity, church or those meeting the “voluntary plan safe harbor” exception.
Applying the provisions of both laws together is confusing, so continue reading below to see if your plan is impacted…
If the following are all true, your plan is impacted starting in 2024:
If your plan is impacted in 2024, it may be required that LTPT employees be enrolled on January 1, 2024.
If the following are all true, your plan is impacted starting in 2025:
If your plan is impacted in 2025, it may be required that LTPT employees be enrolled on January 1, 2025.
Employers and HR representatives: If your company has a plan that is impacted in 2024 or 2025, reach out to your TPA, financial advisor or attorney to determine the best strategy for compliance. Many plan sponsors are choosing to remove service requirements for salary deferral contributions, thereby avoiding having employees caught within these provisions. Additionally, the IRS published proposed regulations on November 24, 2023 that clarify certain aspects of the LTPT rules. Your plan document provider should be reaching out with information about what, if any, actions are needed by year-end to stay in compliance.
Individuals: You shouldn’t be affected by these rules unless you fall into the LTPT definition. If so, congratulations! Reach out to your HR department to find out when you will be able to participate.
Please contact Jason Hamilton, Director of Retirement, if you have questions or would like to learn more at jason.Hamilton@mai.capital.
MAI Retirement is a division of MAI Capital Management, LLC (“MAI”).
MAI is an investment adviser registered with the Securities and Exchange Commission.
MAI does not provide legal or tax advice to retirement plans. Please consult your legal or tax advisor before making any legal or tax decisions.