A Long-Term Part-Time employee is someone who works more than 500 hours but less than 1000 hours for at least three consecutive years. Prior to the SECURE Acts, some retirement plans excluded part‐time workers who worked less than 1000 hours per year. Under the SECURE Acts, LTPT employees who have worked at least 500 hours per year for three consecutive years must be given the opportunity to participate in their employer's 401(k) plan. Years prior to 2021 were excluded from this three‐year determination so the first year a LTPT employee will be eligible to participate under these rules is 2024. The SECURE Act passed in 2022 reduced the requirement from three consecutive years to two consecutive years beginning in 2025.
If your plan document contains a minimum age requirement or an excluded class of employees, LTPT employees who are excluded by those provisions do not need to be offered participation. For example, if you have LTPT employees who are under age 21 and your plan has an age 21 requirement, these LTPT employees can still be excluded from participating in your plan until they reach age 21. The exclusion of LTPT employees via a classification of employees may be subject to a “facts and circumstances” test to determine if the classification is discriminatory for the express purpose of excluding LTPT employees. A rule of thumb for excluded classes of employees is that if the class only includes employees who will work less than 1,000 hours, then those LTPT employees will need to be allowed in the plan under LTPT rules. In essence, the class exclusion can’t be setup as another way to keep LTPT employees out of the plan.
How Do the LTPT Employee Rules Affect Your Plan?
If you have LTPT employees who are not excluded by the plan document in some manner, they must be given the opportunity to make employee deferral contributions to the plan, as of the first day of your next plan year, which for many plans will be January 1, 2024. The IRS thankfully provided two caveats in regard to LTPT employees:
‐ LTPT employees are not required to receive employer contributions; and
‐ LTPT employees are excluded from non‐discrimination testing, such as the ADP/ACP test
If your plan makes employer matching or non‐elective contribution, the LTPT employees can be excluded from those contributions. However, you can choose to include LTPT employees in any employer contributions.
If your plan has an automatic enrollment feature, then LTPT employees will also be subject these rules if they become eligible. Meaning, if a LTPT employee does not otherwise opt out of the plan or select a withholding amount, then you must enroll them in the plan at the default deferral amount, and if applicable increase them each year if automatic increases are included in your plan.
Conclusion
It is anticipated that few LTPT employees will elect to participate in their employer’s retirement plan, and being able to exclude them from non-discrimination testing will keep them from having a negative impact.
We will be conducting our annual wellness calls to all clients in December, and we will ask if you have any LTPT employees, advise you on the actions you must take to include them in the plan, and plan changes that could help mitigate the complicated rules.