What are the long-term part-time rules under SECURE and SECURE 2.0?

On December 20, 2019, the president signed a spending bill that included the SECURE Act. Although many of the SECURE Act’s provisions became effective for plan/tax years beginning after December 31, 2019, one of the provisions concerning long-term part-time (LTPT) employees will soon start affecting plans. This provision requires 401(k) plans (other than collectively bargained plans) to allow part-time employees—including temporary, seasonal, or other employees who generally don’t work 1,000 hours a year—to make elective deferrals to a plan if certain requirements are met that qualify them as LTPT employees.  

How the new LTPT rules will work

The SECURE Act generally defines LTPT employees as being those who complete three consecutive years in which at least 500 hours are worked. Years prior to January 1, 2021, are disregarded for this purpose; therefore, the earliest a part-time employee will be able to enter any plan under the LTPT rules is January 1, 2024. Additionally, the SECURE Act allows a plan to impose an age 21 requirement.

SECURE 2.0 further modified the LTPT rule to require only two consecutive years in which at least 500 hours are worked, effective for plan years beginning after December 31, 2024. Plans will initially look at whether someone meets the three-year rule but then will have to switch to the two-year rule.

The table provides simplified examples based on calendar plan years that switch to plan year after the initial computation period.    

Prior to the SECURE Act, the latest part-time employees could be held out of a plan was until they satisfied a year of service (a 12-month eligibility computation period in which at least 1,000 hours are worked). Going forward, part-time employees must enter the plan no later than:

• when they satisfy a year of service (i.e., 1,000 hours), in which case they’ll still be treated like any other participants, or 
• when they satisfy the LTPT requirement, in which case they can be subject to different rules.

The different rules for LTPT employees

If participants are LTPT employees:

• You aren’t required to give them employer contributions, although you can. 
• They don’t have to be included in the plan’s nondiscrimination testing, although they can be. 
• They can be excluded from the top-heavy minimum contribution requirements.
• A year of vesting will accrue on any employer contributions allocated to LTPT employees if they work at least 500 hours in any vesting computation period (vs. 1,000 hours), but service prior to January 1, 2021, is disregarded for such purpose.

SECURE 2.0 also clarified that safe harbor plans relying on the top-heavy exemption won’t lose that exemption if they exclude LTPT employees from safe harbor contributions.  

Employees who enter the plan as LTPT but who later meet the one year of service requirement (i.e., 1,000 hours) will then have to be treated like any other non-LTPT participants. From that point forward, they’ll be eligible to receive any employer contributions, they’ll have to be included in a plan’s nondiscrimination testing, and they’ll receive any top-heavy contributions. These former LTPT participants, however, may still be tied to the 500-hour vesting rule, pending guidance.  

What this means for your plan and what you should be thinking about

Complying with the LTPT rules is going to create complexity all around—not only for you as a plan sponsor, but also for recordkeepers and payroll providers. Complexity means system changes, tracking multiple eligibility provisions (potentially separate vesting provisions as well), and additional work for all parties. This complexity may inadvertently result in operational failures if recordkeepers receive inaccurate or incomplete data from plan sponsors or payroll providers. It will be more important than ever to maintain good historical payroll records to be able to identify part-time employees and to properly track rehires.  

You need to carefully consider whether you want to treat part-time employees differently than full-time employees. For example, if you currently exclude part-time, temporary, or seasonal employees, or if you have an eligibility requirement that prevents a part-time employee from entering the plan (e.g., one year of service or six months of service in which 500 or more hours are worked), consider that you may do the following:

• Avoid the complicated LTPT rules by reducing the eligibility service requirement, at least for salary deferral purposes; for example:  
  • eliminate any hour requirement for eligibility purposes, or 
  • require no more than 500 hours in a 12-month computation period.
• Impose a different service requirement (no more than a year of service in which 1,000 hours are worked) to receive employer contributions if you’re concerned about additional employer contribution costs. This could apply to all employees or just part-time, temporary, and/or seasonal employees.  

SECURE deadlines you should know

As a reminder, the deadline for SECURE amendments is the last day of the plan year beginning on or after January 1, 2025; plans, however, are expected to comply with the LTPT rules starting January 1, 2024 (for calendar year plans). If you choose to amend your plan’s current eligibility requirements to avoid the LTPT rules, such an amendment must be executed before January 1, 2024 (for calendar year plans).  

Discuss the LTPT rules in advance with your retirement plan service providers

The LTPT rules may create complexity all around for plan sponsors, recordkeepers, and payroll providers. With proper planning and discussion with your plan’s service providers, you should be able to stay on top of any changes that need to be made to plan design, existing processes, and systems. As always, you should seek legal counsel for specific guidance for your plan.

To download our SECURE 2.0 white paper and view our other helpful resources, please visit our SECURE 2.0 resource page.