Long-term Part-time Workers
Here’s What You Really Need to Know:
- The LTPT worker provision is a required provision under SECURE 2.0 for all 401(k) and ERISA-covered 403(b) plans but does not apply to plans such as governmental or church plans.
- The LTPT worker provision expands coverage such that eligible workers can make their own contribution but does not require the employer to make an employer contribution.
- Under SECURE 2.0, a LTPT worker is someone considered to work more than 500 hours or more for two consecutive years. This provision was previously three consecutive years from SECURE 1.0, so plan sponsors need to take note of this updated provision.
Let’s Dive In…
Prior to SECURE 1.0 and 2.0, retirement plans had minimum participation requirements under the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “Code”) where the participation requirements could not extend beyond one year of service and age 21. Plans were allowed to have different participation for different contribution types; for example, the employer contribution could have a more stringent requirement than the employee’s elective deferrals. However, one rule plans have always had to keep in mind – both for 401(k) plans and 403(b)s plans – is that a single class of employees cannot be excluded; for example, seasonal or part-time workers cannot categorically be excluded from the plan.
Legislators kept this rule in mind with SECURE 1.0. Two overarching themes in SECURE 1.0 were (1) expanding coverage to ensure more Americans had access to a retirement plan and (2) addressing longevity so that Americans did not outlive their savings. Keeping these two goals in mind, SECURE 1.0 included Section 112. Section 112 applied to 401(k) plans and provided that any employees who worked at least 500 hours or more for three consecutive years (and who otherwise meet the age and entry date requirements) would be eligible to participate in the plan to make their own employee deferrals, but the employer is not required to contribute to these employees. This provision was effective for plans that began on or after December 31, 2020.
In practice, because of the requirement for three consecutive years, pegging the effective date as plans beginning on or after December 31, 2020, meant that counting hours by employers started in 2021 and employers were not required to count hours before 2021. The first employee eligible to make his/her own contribution would be January 1, 2024 for calendar year plans.
SECURE 2.0 Changes
Many of the provisions in SECURE 2.0 are similar to the provision of SECURE 1.0, but dressed up in a little bigger, better outfit, and Section 125 is no different. Congress took Section 112 from SECURE 1.0 to new levels and expanded coverage for LTPT workers. In SECURE 2.0, LTPT workers provision changed as follows:
- LTPT workers are now considered those workers who work for two consecutive years for 500 hours or more (not three consecutive years).
- The LTPT workers provision includes ERISA-covered 403(b) plans. These plans are traditionally accustomed to the universal availability rules, but the new LTPT workers provision would be broader and cover those traditional exceptions to universal availability.
- The LTPT workers under SECURE 2.0 applies for plans beginning after December 31, 2024, while SECURE 1.0 applies to plans beginning after December 31, 2023, hence, creating a one-year gap between the standards.
The LTPT worker provision is a helpful provision for purposes of expanding coverage, but it requires careful consideration to be taken related to plan operations and administration and to ensure the plan document continues to align with the plan’s operations. The provision undoubtedly imposes additional administrative burden for plan sponsors. Unlike many provisions of SECURE 2.0 that are optional provisions, this provision is a required provision. Plan sponsors should work with their service providers as soon as possible to ensure they are prepared for this provision, and may consider the following practical aspects of their plan and its operations:
- Plan Document Updates: The deadline for plan document updates for SECURE 2.0 is the last day of the first plan year beginning on or after January 1, 2025. Some plan sponsors may already allow all employees, including those defined as LTPT workers to contribute their own dollars, but others may need to update their plan document.
- Plan Operations: Depending on the type of organization, employees may track their hours and the technology may support tracking hours. For other organizations, tracking hours may be more difficult. Keep in mind that plan sponsors should make sure they have the data systems to track 500 hours starting with the effective dates discussed above; alternatively, plan sponsors should ensure their plan document utilizes a method such as equivalencies for tracking hours. The regulations allow various methods for computation of hours based on an equivalency, but the plan document should identify such methods.
- Vesting and Eligibility: Some plan sponsors may decide it’s easier to let all LTPT employees contribute and provide the match for these employees. If so, for plan sponsors that provide an employer contribution to a LTPT worker subject to a vesting schedule, the LTPT employees must accrue a year of vesting service for each year during which at least 500 hours are worked. The reduced requirement for vesting will only apply if employees have entered the plan solely under the LTPT employee provision.
- Nondiscrimination Testing: Plan sponsors are not required to include LTPT workers in non-discrimination testing, including ACP and ADP testing.
These are a few considerations, but plan sponsors should work with a knowledgeable plan advisor/ consultant or ERISA counsel to closely review the plan.
Action Items for Plan Sponsors
As you prepare for the coming year, the LTPT worker provision is one of the required provisions that requires your attention. Consider the following action items to ensure your plan is ready for this provision:
- Determine the service providers that need to assist you in implementing and monitoring this provision (e.g., recordkeeper, third party administrator) and ensure you understand the role those service providers will play.
- Identify any updates to the plan document that may be necessary and notify your service providers accordingly (well in advance of the date those changes are needed).
- Coordinate internally at your organization to ensure that if changes are required to your procedures or systems (e.g., HR systems, payroll, etc.), those updates are made to continue alignment with the plan.
- Stay tuned for updates from the IRS (or other trusted source), as additional guidance may be forthcoming related to many provisions of SECURE 2.0, including this provision.