In the past 401(k) plans were able to exclude individuals who worked less than 1,000 hours per plan year. In recent years though there has been an effort to expand access to employer-sponsored retirement plans. The Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act, has introduced the idea of the long-term part-time employee (LTPT). The SECURE Act provisions require that starting in 2024 LTPTs will be permitted to choose to make salary deferrals to a 401(k) plan. Here are a few more things you need to know about the SECURE Act before it takes effect.
What is a Cash Balance Plan? Check out our Guide
Who Classifies as an LTPT Employee?
Any employee who has completed three consecutive 12-month periods (3 years) with at least 500 hours of service during each period and has reached the age of 21 by the end of the 3-year period is considered an LTPT employee.
Eligibility
Eligibility will be based on the number of hours worked in 2021, 2022, and 2023. This is why it is extremely important for plan sponsors and service providers to accurately track hours for LTPT employees. LTPT employees who meet the requirements listed above must be allowed to contribute salary deferrals to the plan, but they may be excluded from employer contributions and nondiscrimination testing. Employees covered by a collective bargaining agreement are not covered under the SECURE Act.
The SECURE Act may create dual eligibility requirements under the plan, assuming that the plan’s existing eligibility requirements are not as favorable as those required for LTPT employees. Plan sponsors and providers must monitor both sets of requirements.
The SECURE Act was made to help LTPT employees save for retirement.
Employer Contributions
LTPT employees may be excluded from employer contribution matching and profit-sharing, as well as safe harbor contributions. If an LTPT employee does, however, meet the general minimum age requirement and meets the required minimum 1,000 service hours, they become eligible for employer contributions.
Vesting
In retirement plans, employees are always 100% vested in their salary deferral accounts. Under the new SECURE ACT provisions, vesting only applies if an employer voluntarily elects to include LTPT employees in their company contributions. LTPT years of service for vesting purposes must include each 12-month period during which an employee has 500 hours of service or more for all years, including 12-month periods before January 1, 2021.
The Impact of SECURE Act Provisions on Your Plan
The main reason behind the SECURE Act and LTPT rules is to expand retirement coverage to a greater number of working Americans. These rules, however, can have a significant effect on plans designed under prior laws. The possible entry of previously excluded employees and the maintenance of dual eligibility requirements can place an extra burden on plan sponsors and providers. Plan sponsors and providers should make reviewing their plan design to make sure it is compliant with new regulations a priority in 2022. If you need help understanding how the SECURE Act may affect your plan, contact California Pensions today!
