SECURE Act: Rules for Long-Term Part-Time Employees
APRIL 6, 2021
The Setting Every Community Up for Retirement Enhancement (SECURE) Act includes new 401(k) eligibility and vesting requirements for certain long-term part-time (LTPT) employees in the U.S. In connection with these requirements, the Internal Revenue Service (IRS) released Notice 2020-68, which provides further clarification regarding the rules for LTPT employees.
What Are the Long-Term Part-Time Employee Requirements?
The SECURE Act expands the eligibility provisions of 401(k) plans to require that LTPT employees, who previously could have been excluded from participating in the plan if they failed to complete 1,000 hours of service in a 12-month period, must now be allowed to make salary deferral contributions into the plan if certain criteria are met. While the SECURE Act excludes contributions made by LTPT employees from nondiscrimination testing, and does not require employers that sponsor plans to make contributions to LTPT employees, special vesting requirements apply in the event the employer makes such contributions.
Special Eligibility Rules
Under the SECURE Act, effective January 1, 2021, eligible LTPT employees are defined as employees who are at least 21 years old and have worked three consecutive 12-month periods in which they performed at least 500, but less than 1,000, hours of service during each period. Plan years prior to January 1, 2021, are disregarded when determining whether an LTPT employee must be allowed to make elective deferral contributions — which means the earliest an LTPT employee could become eligible to participate in a plan is January 1, 2024. After LTPT employees meet these criteria, they will be eligible to contribute salary deferrals to the 401(k) plan during any future year.
These new eligibility rules only apply to LTPT employees of employers that sponsor 401(k) plans. They do not apply to LTPT employees of employers that sponsor 403(b) plans or 457(b) plans. In addition, the new eligibility rules do not apply to collectively bargained plans.
Employer Contributions and Special Vesting Rules
The SECURE Act does not require employers to provide contributions to LTPT employees who become eligible to defer. However, if the plan does provide employer contributions to LTPT employees, then all years the LTPT employee served with the employer during which the LTPT employee had attained age 18 and performed at least 500 hours of service within a 12-month period must be credited for vesting purposes to determine the LTPT employee’s nonforfeitable right to such employer contributions.
The SECURE Act does not require plans to include LTPT employees in annual nondiscrimination testing, nor does the SECURE Act require plans to make any top-heavy minimum contributions on behalf of LTPT employees.
Next Steps for Employers to Implement LTPT Employee Requirements
Tracking Hours for Part-Time Employees
401(k) plan sponsors that do not already track part-time employees’ hours of service should start doing so for plan years beginning after December 31, 2020, in order to determine each employee’s eligibility to defer into the plan. Plan sponsors that do not want to track hours for eligibility purposes may consider alternatives such as allowing part-time employees to enter the plan and make employee deferrals only, or allowing all part-time employees to enter the plan as of January 1, 2024. However, alternative approaches should be carefully considered, as the exemptions from the testing requirements only apply to employees who are actually classified as LTPT employees.
We continue to monitor the SECURE Act requirements, and we will provide additional updates as new information becomes available.
If you have any questions or would like additional information, please contact your USI Consulting Group professional.