Overview
In this series of articles, we explore the implications of the long-term, part-time employee rules under the SECURE Act and SECURE 2.0 and the impact those rules have on employers and their workforces.
Under the SECURE Act and SECURE 2.0 Act, employers must provide long-term, part-time employees the opportunity to make elective deferrals under their 401(k) plans and, beginning in 2025, their 403(b) plans. Under the new rules, long-term, part-time employees include those employees who complete at least 500 hours of service in three consecutive years (reduced to two years in 2025), are at least 21 years old and enter the plan solely because they satisfy this requirement.
When this occurs, certain special rules apply to such employees, including rules that impact when employees become vested and whether such employees must be included in annual nondiscrimination testing or must receive top-heavy vesting and benefits. As a result, many employers have asked whether employees who enter the plan as long-term, part-time employees are always treated like long-term, part-time employees or if that can change throughout the course of their careers. The answer is, well, complicated, and the impact differs depending on whether the employer is applying the special vesting or nondiscrimination and top-heavy rules to such employees.
In Depth
The amount of time employees—especially hourly-paid or part-time employees—work for their employers each year may vary, at times considerably. As a result, over the course of their careers, some employees may shift between working just enough to meet the 500-hour eligibility requirement to enter the plan as long-term, part-time employees, later working more full-time schedules and then returning to more periodic, part-time service. This has always been true; that is, certain industries and positions have always involved working hours of service that vary from year to year.
Historically, the rules governing how long all employees could be asked to wait before joining an employer’s retirement plan generally aligned with the rules used to determine when employees were required to be credited with vesting service and which employees were required to be included in nondiscrimination testing or receive top-heavy vesting or benefits. The new long-term, part-time employee rules change that by creating special vesting, nondiscrimination testing and top-heavy rules for employees who enter the plan as long-term, part-time employees. As a result, it is important to understand when an employee who enters the plan as a long-term, part-time employee ceases to be one and what the impact is when that occurs.
The Internal Revenue Service (IRS) answers this question in its recently proposed regulations. There, the IRS explains that an employee will stop being a long-term, part-time employee on the first day of the first plan year beginning after the year in which the employee either (1) completes 1,000 hours of service in a 12-month period or (2) becomes an ineligible employee.
Importantly, employees who become former long-term, part-time employees because they transition to ineligible positions can return to long-term, part-time employee status. The proposed regulations explain that, in such cases, employees will again be considered long-term, part-time employees as of the first day of the first plan year during which the employees again become eligible employees. However, similar rules do not apply where employees become former long-term, part-time employees because they eventually complete 1,000 hours of service in a 12-month period. Instead, in those cases, the employees will never return to long-term, part-time employee status.
These rules are, at best, complicated, to put it mildly. They introduce a host of new issues that are expected to impact plan administration. As a result, sifting through all those potential issues and the related considerations can be a bit daunting. But, to start, it is important for employers to be sure they understand (1) if the new rules even apply to their employees, (2) how they are tracking service under the rules that do apply and (3) when those rules cease to apply to certain employees.
In doing so, it will be equally important for employers to distinguish between how long-term, part-time employees and former long-term, part-time employees must be treated under the new eligibility rules, as compared to how they must be treated under the vesting, nondiscrimination testing and top-heavy rules. This is because while all the new long-term, part-time employee rules are related, they are not the same, and long-term, part-time employees and former long-term, part-time employees may be treated differently for different purposes under the plan.
For any questions regarding SECURE 2.0 changes, please contact your regular McDermott lawyer or one of the authors.
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Read First Article: A Long-Term, Part-Time Employee or Not a Long-Term, Part-Time Employee, That Is the Question
Read Third Article: Under Long-Term, Part-Time Employee Rules, Some Things Change, and Some Things Stay the Same
Read Fourth Article: IRS Confirms Same Hours-Counting Rules Still Add Up for Long-Term, Part-Time Employees
Read Fifth Article: When It Comes to Vesting, IRS Says Once a Long-Term, Part-Time Employee, Always a Long-Term, Part-Time Employee
Read Sixth Article: This Is Not a Test! IRS Confirms Long-Term, Part-Time Employees Excludible From Certain Nondiscrimination Testing
Read Seventh Article: New Rules Make Tracking Long-Term, Part-Time Employee Service a Full-Time Job
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