BST & Co. | Accounting, Business Advisory, and Management Consulting
Retirement plan changes for long-term, part-time employees
ARTICLE | February 20, 2023
Authored by RSM US LLP
The Internal Revenue Code (the Code) has historically allowed employers to exclude employees who never worked at least 1,000 hours in a 12-month period from an employer sponsored retirement plan. Because of this, part-time employees who never reach this threshold often miss out on an opportunity to set aside money for retirement. Such employees include individuals who have limited time to devote to work, such as parents, caregivers, and students. Additionally, some people have multiple part-time jobs, due to a need for flexibility. Based on data from the Bureau of Labor Statistics, there were close to 25.5 million people working part-time in 2021.
Congress has long been concerned about increasing retirement savings for individuals and included changes to the Code to benefit long-term, part-time (LTPT) employees with the Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0). In short, effective in 2024, SECURE 1.0 requires that 401(k) plans allow employees with more than 500 hours of service in three consecutive 12-month periods to contribute elective deferrals to the plan.
The SECURE 2.0 Act of 2022 (SECURE 2.0), brought forth enhancements to Secure 1.0’s LTPT provisions, effective for plan years beginning after Dec. 31, 2024, which furthers the goal for more individuals to have retirement savings. The 401(k) plan requirement to allow employees to contribute elective deferrals was expanded to 403(b) plans and the period of service was reduced from three to two consecutive 12-month periods. SECURE 2.0 also added clarity to changes made by SECURE 1.0.
401(k) plan sponsors may believe the SECURE 2.0 provisions override SECURE 1.0 and that they do not need to act until 2025. This is not the case. Employers, plan sponsors, and third-party administrators need to understand how plan operations will be affected for plan years beginning in 2024 and what they must do now to be prepared for the changes. They also should be cognizant that the IRS will likely issue additional guidance on these provisions.
Summarized below is a discussion of how the SECURE 1.0 and 2.0 LTPT provisions apply to retirement plan operations. It should be noted that collectively bargained employees and non-resident aliens with no U.S. source income are excluded from the LTPT provisions.
For plan years beginning in 2024, if an employee has three consecutive 12-month periods with more than 500 hours of service in each, the employee must be eligible to enter the plan. Periods beginning prior to Jan. 1, 2021, are not considered when determining eligibility; therefore, 2024 is the first possible year LTPT employees must be allowed to participate in a 401(k) plan for purposes of elective deferrals. An employee’s initial 12-month period ends on their first anniversary date of employment. Subsequent periods can continue to be based on anniversary year or can switch to the plan year. The LTPT employee rules apply to employees who are at least age 21.
Examples (assumes the employee is at least 21):
Oliver was hired in 2018 and has never been eligible to participate in the employer’s 401(k) plan, which operates on a calendar year. He works 750 hours in 2021, 2022 and 2023. He has completed three consecutive 12--month periods (plan year method) with more than 500 hours and can enter the plan on Jan. 1, 2024.
Felicity is hired June 13, 2021 and works 650 hours in her anniversary years ending June 12, 2022, 2023 and 2024. Her employer sponsors a calendar year 401(k) plan with entry dates of Jan. 1 and July 1. She has completed three consecutive 12-month periods with more than 500 hours on June 12, 2024; therefore, she can enter the plan on the next entry date, July 1, 2024.
For plan years beginning in 2025, the employee needs only two consecutive 12-month periods with more than 500 hours of service in each to be allowed to participate.
Examples (assumes the employee is at least 21):
Roy was hired in 2022. He worked 300 hours in 2022, and 650 hours in both the 2023 and 2024 plan years. He is eligible to enter the plan in 2025 on the next plan entry date.
John was hired in 2022 and worked 550 hours in both the 2022 and 2023 plan years. However, he only worked 300 hours in 2024. Is he eligible to enter the plan in 2025 on the next plan entry date? Yes, since he had satisfied the two-year requirement in 2022 and 2023, he would be eligible at the earliest possible time to enter the plan, which would be 2025.
Top heavy rules
Plans that are top heavy must satisfy minimum contribution and vesting requirements. An employer can elect to exclude the LTPT employees from these requirements.
A defined contribution plan is a top-heavy plan if the aggregate of the accounts of key employees exceeds 60 percent of the aggregate of the accounts of all employees under the plan.
In determining whether the plan is top heavy, it will not be considered top heavy merely because employer contributions are not made to LTPT employees.
403(b) Plans subject to ERISA
The first year a 403(b) plan must allow an LTPT employee to enter the plan is 2025. For plan years beginning in 2025, an employee must have two consecutive 12-month periods with more than 500 hours of service in each. Periods beginning before January 1, 2023, will not be taken into account when determining if the employee has satisfied the two consecutive 12 month periods requirement. Consistent with 401(k) plans, the employee must be at least age 21.
403(b) plans are subject to the universal availability rules and there are employee exclusions unique to the plans. For example, students enrolled in and working at a school can be excluded from participating in the school’s 403(b) plan. The LTPT provisions will likely result in some students being eligible for the plan. However, we expect additional guidance to be released on how these LTPT requirements will interact with the universal availability rules.
401(k) Plans and 403(b) Plans subject to ERISA
Employers are not required to, but can, make match or nonelective contributions to the accounts of LTPT employees. This includes contributions under the safe harbor 401(k) plan provisions.
An employer can elect to exclude LTPT employees from nondiscrimination testing related to elective deferrals (ADP), employer match (ACP) and nonelective contributions (section 401(a)(4)). Additionally, they can be excluded from coverage testing under section 410(b).
A LTPT employee is credited with a year of vesting service for each 12-month period the employee has at least 500 hours of service. For 401(k) plans, 12-month periods beginning prior to Jan. 1, 2021, are not counted. For 403(b) plans, periods beginning prior to Jan. 1, 2023, are not counted. If an employer chooses to make a non-safe harbor employer contribution for LTPT employees, the plan’s normal vesting schedule will apply.
Other operational considerations
There are many factors that come into play for proper administration of the LTPT provisions, including appropriate tracking of hire dates and hours worked in the employer’s HRIS or payroll system, transmission of the information to the plan’s third-party administrator and recordkeeper, and timely notification to LTPT employees of their eligibility for the plan. 401(k) plan sponsors should have already laid out a strategy for how to handle tracking of the appropriate data since periods beginning in 2021 count towards eligibility. Sponsors of 403(b) plans will now need to do the same.
Employers should evaluate their systems and the additional administrative burden involved with operating their plans under the LTPT provisions. Furthermore, sponsors should review their plan design and consider whether allowing all employees to enter the plan for purposes of deferral contributions immediately upon hire would be worthwhile. All employees could be treated the same, avoiding the need to carve out employees for different purposes.
Service requirements can continue to be applied for purposes of employer contributions. However, employers should consider whether they want LTPT employees to share in employer contributions and, if so, how to track hours for vesting purposes.
The LTPT provisions are only the tip of the iceberg when it comes to retirement plan changes brought about by SECURE 2.0. This is the perfect time for a holistic review of an employer’s retirement plan design and operations against the required changes and discretionary provisions of SECURE 2.0. In any such review, the employer should work closely with their retirement plan advisors as they need to consider if and how recordkeepers and third party administrators can accommodate their desires.
This article was written by Christy Fillingame, Catherine Davis, Chloe Webb and originally appeared on 2023-02-20.
2022 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
BST & Co. is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how BST & Co. can assist you, please call (518) 459-6700.