Updated December 1, 2023
The 2019 SECURE Act (SECURE 1.0) and the SECURE 2.0 Act of 2022 (SECURE 2.0) have introduced significant changes to retirement plan rules; they aim to set millions of Americans on a path to a more financially secure retirement by creating new savings opportunities and expanding access to workplace retirement plans. One of the fundamental changes introduced by SECURE 1.0 is opening retirement savings programs to part-time employees, and SECURE 2.0 attempted to accelerate this change.
Employee Eligibility before SECURE
Historically, to participate in most workplace retirement plans, employers required individuals to meet minimum service rules as defined in Internal Revenue Code (IRC) section 410(a):
- Attain age 21
- Complete a year of service, typically 12 months (what we refer to as Eligibility Computation Periods or “ECPs”) with at least 1,000 credited hours
Many part-time workers, especially those in seasonal or temporary roles, remained ineligible to participate in 401(k) plans as a result of these “traditional” service rules. (For additional detail on eligibility and entry, including ECPs, read this article.)
SECURE 1.0
The dynamics changed with the passage of the first SECURE Act. Starting in 2021, employees not meeting the “traditional” service rules must be allowed to contribute to a 401(k) plan once they fulfill two conditions:
- Attain age 21
- Complete at least 500 hours in each of three consecutive ECPs
This employee group received a new name: Long-term Part-time (LTPT) employees. When identifying LTPT employees, employers may disregard employment history before 2021; as a result, the first LTPT employees will become eligible to benefit in a 401(k) plan on January 1, 2024 (or, for plans that do not operate on the calendar year, the first day of the plan year beginning in 2024).
Enter SECURE 2.0
Intending to cast a wider net, Congress modified the new LTPT rules by making two changes effective in 2025:
- Altering the requirement so that at least 500 hours need only be completed in two consecutive ECPs rather than three.
- Extending the LTPT rules to 403(b) plans (with certain exceptions). This article focuses on 401(k) plans. More on the LTPT rules and 403(b) plans
- SECURE 2.0 also clarified that pre-2021 work history may be disregarded when calculating both employee eligibility and vested account balances.
What’s the Impact on Determining Eligibility?
The “traditional” service rules (or a plan’s stated eligibility rules, if less restrictive) and the LTPT rules now work together. An employee is allowed to contribute to a 401(k) plan upon completion of the earlier of the two. Consider a 401(K) plan that uses the “traditional” minimum service rules for eligibility (i.e., age 21 and completion of a year of service – an ECP with 1,000 hours); it must now additionally apply the LTPT rules. Here’s what eligibility determination could look like for three employees, all older than 21 and working different schedules:
| ECP | Employee 1 | Employee 2 | Employee 3 |
|---|---|---|---|
| Pre-2021 | <1000 hours worked (Pre-2021 disregarded for LTPT) |
<1000 hours worked (Pre-2021 disregarded for LTPT) |
<1000 hours worked (Pre-2021 disregarded for LTPT) |
| 2021 | 500 hours worked | 200 hours worked | 500 hours worked |
| 2022 | 500 hours worked | 500 hours worked | 1000 hours worked |
| 2023 | 500 hours worked | 500 hours worked | Eligible: “Traditional” Rules (not an LTPT Employee) |
| 2024 | Eligible: SECURE 1.0 – completed 3 consecutive years with 500 hours (LTPT) | 200 hours worked | Continues participation |
| 2025 | Continues participation | Eligible: SECURE 2.0 – completed 2 consecutive years with 500 hours (LTPT) | Continues participation |
This employer must initially look at whether someone meets the plan’s “traditional” requirements. If not, the employer then considers whether they meet the LTPT rules; for one year only (2024) they consider the three-year requirements from SECURE 1.0, and starting in 2025, they switch to the two-year requirements from SECURE 2.0.
Important Note: The LTPT rules do not affect eligibility conditions for employer contributions, such as safe harbor, match, or profit-sharing. The LTPT rules affect when an employee must be allowed to contribute from their pay to a 401(k) plan. In the above example, employees 1 and 2 are not required to receive employer contributions because they enter the plan under the LTPT rules.
The Distinct Rules for LTPT Employees
The LTPT concept was designed to create more retirement savings opportunities for part-time workers. Consequently, several unique provisions apply to LTPT employees in retirement plans:
- Employer Contributions: Employers are not required, but may, contribute to LTPT employee accounts to incentivize part-time work or reward their achievements.
- Compliance Testing: LTPT employees may be excluded from the annual compliance testing, ensuring they do not negatively impact a plan’s testing outcomes.
- Vesting: Vesting determines when dollars in a retirement account become an employee’s property. When applying vesting rules for employer contributions to LTPT employees, a year of vesting is credited for each plan year with at least 500 hours instead of the customary 1,000 hours. However, service before 2021, is not considered in vesting calculations for LTPT employees.
Important Note: Those who initially join the plan under the LTPT rules and subsequently fulfill the ”traditional” one-year service requirement (or a plan’s stated eligibility rules, if less restrictive) will be treated like typical non-LTPT employees. They become eligible for employer contributions, and must be incorporated into the plan’s typical compliance regime (including testing). Proposed regulations issued by IRS 11/26/2023 clarify that the 500-hour vesting rule would continue to apply to former LTPT employees throughout their employment, creating potentially favorable treatment over similarly employed staff who did enter the plan under the LTPT rules.
Do LTPT Rules Apply to You?
The LTPT rules will apply in the following situations:
- You already have or intend to hire employees who work 500-999 hours per year, AND
- You have a 401(k) plan with eligibility terms that
- Require more than 500 hours in an ECP to determine when an employee can begin saving, and / or
- Exclude certain groups from participating in the plan based on part-time or seasonal job classifications (or other job classifications that effectively only exclude part-time employees). Proposed regulations issued by IRS 11/26/2023 clarify that LTPT employees need not be covered by the plan if they fall into an excluded job classification (like location or division). However, it will be important to review the effects of existing job classification exclusions to ensure they are not “disguised service” conditions that effectively only exclude staff who are LTPT
Decisions, Decisions
Those affected by the LTPT rules face a fork in the road – abide by the new LTPT rules or redesign their retirement plan eligibility terms to avoid them entirely. Here are some of the considerations under each scenario:
Option 1: Abide by the New LTPT Rules
- Review current HR and payroll systems to ensure they track hours appropriately for all employees.
- Review and update plan communication materials that describe eligibility requirements, entry dates, and other plan features and rights to account for the new LTPT population.
- If the plan currently uses automatic enrollment and automatic savings rate increase features, consider how they may affect the new population of eligible employees.
- If, when calculating employee eligibility and vested amounts, the plan currently uses an equivalency method (e.g., crediting 190 hours to an employee who worked at least one hour during a month) instead of tracking actual hours, consider whether changing the equivalency method or switching to tracking actual hours may be in order.
- Determine whether to include LTPT employees when making employer contributions.
- Consider defining the required hours for earning a year of vesting service as 500 to level the playing field between the full-time and part-time populations and simplify tracking.
Option 2: Adjust Eligibility to Avoid the New LTPT Rules
Employers can sidestep the intricate LTPT rules altogether by modifying their plan eligibility requirements. For instance, by setting a threshold of 500 hours in a 12-month period for eligibility to make 401(k) contributions or removing the hours of service requirement altogether, the LTPT rules are effectively avoided.
As an added benefit, avoiding the LTPT rules means no new rules to follow related to determining vested account balances.
However, only LTPT employees may be disregarded entirely for purposes of employer contributions and compliance testing. Depending on various factors about your plan, its design, and your employer funding goals, it may be possible to avoid the LTPT rules while minimizing (or avoiding) additional staff costs and compliance testing concerns. Your Pinnacle Plan Design consultant can help you understand how a change in eligibility will affect outcomes specific to your situation.
To follow this path and avoid the LTPT rules, employers must act swiftly by amending plan eligibility before their 2024 plan year begins.
Action Is Needed Either Way: Whether choosing option 1 or option 2 (abiding by LTPT rules or adjusting eligibility to avoid them) employers need to update their policies and procedures to identify employees eligible for enrollment, adjust their payroll systems, amend their employee benefits materials, and coordinate the changes with their investment platform providers.
Additionally, beginning with the 2023 compliance year, plans with 100 or more account balances on the first day of the plan year will generally be required to have an audit. Employers should consider whether the newly eligible employee population will increase the number of accounts in the plan (which is certainly the goal of the legislation) and necessitate an audit.
LTPT Amendment Deadlines
Operationally, compliance with the LTPT rules is mandated by January 1, 2024 (or the first day of the plan year beginning in 2024, for plans not operating on a calendar year). The amendment deadline to add the LTPT changes into the plan document is the last day of the plan year starting on or after January 1, 2025.
Let Pinnacle Plan Design Help
Consultants at Pinnacle Plan Design are actively monitoring new guidance concerning SECURE 2.0. This represents our understanding of the laws at this time. Additional guidance will provide additional clarity. If you have any questions about the application of the LTPT rules in your retirement plan, don’t hesitate to contact us at (520) 618-1305.