Plan Sponsor decisions for long-term, part-time employees

Revised March 2023: Considerations for Plan Sponsors

SECURE 2.0 Act of 2022
On December 29, 2022, President Biden signed into law the SECURE 2.0 Act of 2022 (SECURE 2.0). This occurred as part of the passage of the Consolidated Appropriations Act, 2023, a federal government spending package. The bipartisan legislation builds on the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0), retirement legislation signed into law at the end of 2019, and includes reforms that seek to expand retirement coverage and savings. There were two changes to the long-term, part-time employee provision, one for 401(k) plans for the 2024 plan year and another for both 401(k) and 403(b) plans subject to ERISA for 2025 and subsequent plan years.

For the plan year beginning in 2024 for 401(k) plans: Service prior to 2021 is disregarded for vesting purposes so that the eligibility and vesting service requirements are harmonized. This change means that 401(k) plans in effect before 2021 will be subject to the three consecutive year eligibility service requirement for the 2024 plan year and the vesting service before 2021 will be disregarded. The three consecutive year eligibility service requirement will be reduced to two consecutive years beginning with the 2025 plan year. This does not change the other requirements that an employer can determine if they want to offer any long-term, part-time employees any employer contributions and/or include them in certain nondiscrimination tests.

For plan years beginning in 2025 for 401(k) and 403(b) plans subject to ERISA:

401(k) Plans: Expands plan eligibility for long-term, part-time workers after two consecutive years of service, except in the case of collectively bargained plans. Employers maintaining a 401(k) plan may need a dual eligibility requirement under which an employee must complete either a one- year of service requirement (1,000 hours of service during the 12-month eligibility service computation period) or two consecutive years of service where the employee completes at least 500 hours of service in a 12-month eligibility service computation period. Service prior to 2023 is disregarded for vesting purposes so that the eligibility and vesting service requirements are harmonized. This does not change the other requirements that an employer can determine if they want to offer any long-term, part-time employees any employer contributions and/or include them in certain nondiscrimination tests.

403(b) Plans Subject to ERISA: This provision also extends the long-term, part-time coverage rules to 403(b) plans that are subject to ERISA. The two consecutive year eligibility and vesting service requirements will apply to these 403(b) plans starting in 2025, which means that 2023 and 2024 will be “look-back” years in 2025.

The information below is still relevant to SECURE 1.0 Act and is 401(k) plan specific, 403(b) guidance will follow at a later date.

In our previous article we reviewed the significant changes that the SECURE Act has brought for long-term, part-time (or LTPT) employees and their ability to contribute to a 401(k) plan. Before you read on, familiarize yourself with the basics before we dive into more detail in this article.

What is changing for long-term, part-time workers?

Under the SECURE Act, plan sponsors have a few decisions to consider for their LTPT employee plan provision. Watch this short video to review these decisions at a high level and continue reading for more details.

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What do I need to consider?
There are three main considerations for plan sponsors when implementing the LTPT employees’ provision.

1. Do you want LTPT employees to receive any employer contributions such as nonelective and/or matching contributions?
Offering employer contributions to LTPT employees is an optional election. You have the discretion to include or exclude LTPT employees for any employer contributions.

You may want to offer the same employer contributions, such as nonelective and/or matching contributions, that are offered to your full-time employees. There are some cost considerations for offering employer contributions, but:

LTPT employees’ compensation will be less than your full-time employees since they only work a limited number of hours.
LTPT employees may choose not to make any deferral contributions so you will not have to make any employer contributions.

Fidelity’s administrative best practice will be to exclude all LTPT employees from any employer contributions unless a plan sponsor elects otherwise.

Other plan requirements: You can still impose certain requirements for LTPT employees to receive an employer contribution for a plan year. For example, a plan document could include the requirement that the LTPT employee must be employed on the last day of the plan year to receive an employer contribution.

2. Do you want to exclude LTPT employees from non-discrimination and top-heavy tests?
For a 401(k) plan to remain qualified, it must pass required annual non-discrimination and top-heavy tests to ensure the plan benefits are not discriminatory in favor of highly compensated employees. The tests include minimum coverage, actual deferral percentage, actual contribution percentage, benefits, rights, and features, and the top-heavy. You have the discretion to include or exclude LTPT employees in those tests. Here are some considerations:

Smaller deferral contributions: If you believe that the LTPT employees will make minimal deferral contributions since they are working part-time and you include them in your tests, it may adversely affect the plan causing it to fail one or more tests.
Larger deferral contributions: Conversely, if you believe that the LTPT employees will make large deferral contributions, then including them in the applicable test may be beneficial and enable the plan to pass one or more of the tests.

3. Is it better to allow LTPT employees to participate in the plan like full-time employees?
When it comes to some of the key decisions for how LTPT employees are included in your 401(k) plan, it may be tempting to simplify the plan’s design and employee experience. Differences in the plan’s eligibility, employer contributions and vesting requirements for LTPT employees and your full-time employees can create administrative and communication challenges for your benefits teams instead of having the same requirements for all employees

Here are a few considerations:

Eligibility requirement: An employee must satisfy the plan’s age, service, and entry date requirements to participate in the 401(k) plan. LTPT employees must work at least 500 hours of service in a 12-month computation period for three consecutive years. Tracking hours of service and having different eligibility service requirements for your full-time versus your LTPT employees increases the administrative complexity, since there are two sets of rules to follow.

Note: Under SECURE 2.0 vesting service for computation periods before 2021 is excluded. In addition, SECURE 2.0 Act reduced the three consecutive year requirement to two consecutive years for plan years that begin on or after January 1, 2025.
Employer contributions: Having different eligibility requirements for employer contributions for your full-time versus your LTPT employees increases the administrative complexity, since there are two sets of rules to follow.
Vesting: Hours of service will need to be tracked for vesting purposes. Once an LTPT employee becomes a participant then they must be credited with a year of vesting service for all years of service that they worked at least 500 hours of service in a vesting computation period, even for those plan years before 2021. The 500-hour requirement will still apply even if the LTPT employee becomes a full-time employee. Reviewing prior years’ employee records to determine whether an employee worked at least 500 hours of service for each year can be tedious and time consuming.

You may want to consider the cost and time of your benefit resources that may be required to administer different eligibility, employer contribution and vesting provisions compared to having the same requirements for all employees. Additionally, Plan sponsors may want to consider changing their plan’s service crediting method to use the elapsed time method for purposes of eligibility service so that all employees will have the same service requirement.

Is it possible for a LTPT employee to work enough hours to qualify as a full-time employee? Some employees will work enough hours to become full-time employees based on your 401(k) plan’s eligibility provision and become participants before the LTPT employee rules apply. Even after an employee becomes a participant in the plan as an LTPT employee, they may work enough hours to become a full-time employee in the future. In that case, they will switch from being classified as an LTPT employee to a full-time employee on the first day of the next plan year. These employees will then be entitled to the same benefits as your full-time employees, including employer contributions if your plan offers them. Continued monitoring will be required to determine which LTPT employees become full-time employees and if you must provide Fidelity with eligibility and vesting information for them in the future.

4. When do I need to amend our plan document for the LTPT employee provision?
You must amend the plan document for the LTPT employee provision by December 31, 2025. *

Fidelity will prepare a Good Faith Amendment for plan sponsors who are using our preapproved plan document for the LTPT employee elections. Timing has not been determined, but Fidelity will notify you once we are ready. The default option will be to exclude all LTPT employees from any employer contributions unless a plan sponsor elects otherwise.

Will the LTPT employee provision impact our payroll and other aspects of the plan?
The new provision may impact your payroll system or your vendor’s payroll system. Data exchange between Fidelity and your payroll system or your vendor’s payroll systems, and vice-versa, may require additional data elements. Other considerations include the impact on employer nonelective and/or matching contribution calculations, internal processes and procedures, HR systems, employee enrollment and communication material, and summary plan descriptions. Fidelity will make changes to the content on NetBenefits to reflect relevant LTPT employee information.

Next steps
You should carefully consider these decisions and the potential changes they may have on your 401(k) plan. Please consult with your legal counsel and/or benefits consultant to prepare for the changes and consider the impact of any future legislative changes and/or IRS guidance. We will also keep you apprised of any new developments.

*Plan documents were required to be amended for the SECURE Act to incorporate the requirements by the last day of the plan year that begins in 2022, but the deadline for governmental plans or applicable collective bargaining plans was the last day of the plan year that begins in 2024. IRS Notice 2022-33 made some changes to the deadline.