Written by Kristian Kananen & Christopher Tipper
When ERISA was originally signed into law, qualified retirement plans were required to allow employees to become participants once they had completed 1 year of service in which they had completed 1,000 hours of service and attained age 25. The age requirement was eventually lowered to age 21, but the 1,000 hours in 12 months has remained.
These eligibility requirements ensured part-time employees were not allowed to enter the plan, thus reducing employer costs and helping to ensure passage of coverage and discrimination testing. The SECURE Act of 2019 has changed this, but only for Long Term Part Time (LTPT) employees and only for 401(k) deferral purposes . A LTPT employee is an employee who has worked less than 1,000 hours, but more than 500 hours in each year for three years. These employees could be lower skilled hourly paid employees or highly skilled “Gig” workers hired to complete a specific task (although most Gig workers are hired as independent contractors, if they meet the criteria.) For the last several years, Members of Congress have expressed concern over the lack of retirement savings for lower income employees and the burden they represent for government programs in the future.
Plan Sponsors have always had the ability to be more liberal in eligibility service than ‘12 months with 1,000 hours’. So, if your eligibility requirements require less than 12 months or less than 1,000 hours in a 12- month period, the participation door was opened for your part-time employees to become full participants in the plan. The SECURE Act of 2019 will not impact the eligibility for any of your employees and we will discuss your situation in more detail later.
For those plan sponsors whose plans have the standard eligibility of age 21 and 1,000 hours in a 12-month period, the SECURE Act definitely impacts participation in the plan. But not immediately. In today’s economy, a company may have had employees who have been employed for years but never completed the 1,000 hour requirement and so, never became participants in the plan. The SECURE Act of 2019 has changed this by adding another level of service eligibility for those LTPT employees.
Any employee who works more than 500 hours but less than 1,000 hours will enter the plan once they have completed their hours in each of three consecutive plan years beginning with 2021,. The hours counted for the LTPT employees are the hours for which they are paid or entitled to payments. Once they enter the plan they are eligible to make 401(k) deferrals only with no employer contributions required for or offered to them. So, no match, no safe harbor and no profit sharing contributions. The earliest they can enter the plan is the plan year beginning in 2024 if they complete more than 500 hours in 2021, 2022 and 2023. This means that the plan sponsor must track their hours of service each year. In all likelihood, these LTPT employees are hourly paid, so the number of hours will be relatively easy to determine each year.
Because they are in the LTPT employee group and are only participants in the plan because of the SECURE Act, they are not included in ADP nondiscrimination or coverage testing and will not receive any top heavy benefits.
Tracking of LTPT employees’ hours must begin for 2021 so that at the end of 2021 when you report employee census to your TPA you must include all LTPT employees.
Assuming 1/1/2024 is a plan entry date for your plan, the LTPT employees who completed more than 500 hours, but less than 1,000 hours in 2021, 2022 and 2023 will be eligible to make salary deferrals. For example,
|LTPT Employee||2021 hours||2022 hours||2023 hours||Entry Date|
While “LTPT 3” completed more than 500 hours in two of the three years, he has not met the eligibility requirements to enter the plan. His 3 consecutive years with more than 500 hours begins again with the 2023 year.
So, while this is a change in who is eligible to participate in the plan, it is simple. They enter the plan for salary deferral purposes only and have no impact on any testing. It becomes more complicated when plan eligibility is modified to allow a LTPT employee to share in any employer contributions.
A benevolent plan sponsor who decides that if LTPT employees will be participants in the plan for deferral purposes, why not let them share in the matching contribution and the employer non-elective contribution or the safe harbor contribution? The impact of such a decision would mean:
- Hours completed in each year back to date of hire must be determined for each LTPT employee in order to determine if the LTPT employee has earned vesting service. Deferrals are always 100% vested, so the history of service would apply to only employer contributions.
- The hours required to earn a year of vesting service for LTPT employees is 500 hours per year.
- As guidance currently stands, LTPT employees would have to be included in all coverage and discrimination testing which may create issues with the plan design. Those employees who were considered when the plan was designed, may not be benefiting as much after the LTPT employees are added for employer contribution purposes as they were before.
These conditions are what plan sponsors with minimal eligibility requirements allowing employees who work less than 1, hours per year to enter the plan for all purposes have been dealing with each year. Such a plan includes all employees who met eligibility requirements for employer matching contribution, safe harbor contributions and non-elective contribution purposes. It also is required to include the employees working less than 1,000 hours in all discrimination testing, even though those with less than 1,000 hours may be considered ‘otherwise excludable’ and tested separately.
With the mandated addition of the LTPT employees to a plan, an employer might be tempted to amend their plan to treat those employees who complete less than 1,000 hours in accordance with the new rules. Be aware that eligibility service can only be changed prospectively. . Only new hires would be impacted by a change in eligibility service. It is not possible to require eligibility service exceeding 2 years for employer contributions, so such an amendment would bring the LTPT employees in earlier than required by law. An example of no good deed goes unpunished.
As long as the LTPT employees participate for deferral purposes only, their addition to a plan is simple. They are held in a special category of participants and do not impact plan testing, or the amount of employer contributions. They may impact the fees to maintain the plan when there is a per participant charge.