The SECURE Act that was signed into law on December 20, 2019 added a new provision for Long-Term Part Time (LTPT) employees. The idea was to open up access to Employer sponsored 401(k) plans for LTPT employees that would not otherwise satisfy the plan’s eligibility requirements. This will allow them to defer into the 401(k) plan and save for their retirement.
In order to qualify for plan entry, LTPT employees have to attain age 21 and complete more than 500 hours of service in three consecutive years. Tracking of hours for purposes of the 500-hour requirement began as of January 1, 2021. So, the earliest entry date for LTPT employees under this new 500-hour rule will be January 1, 2024. Fortunately, service prior to 2021 will not be counted for eligibility.
Who is affected by this provision? Plans with an eligibility service requirement that is more restrictive than 500 hours in a 12-month period could be impacted. For example, a common eligibility service requirement is a year of service where employees need to work 1,000 hours in their first 12 months of employment. If the Employer has employees that meet the LTPT employee definition, they would need to be offered the opportunity to defer even though they never completed 1,000 hours. Plans that currently exclude part-time employees scheduled to work less than 1,000 hours could also be affected by this new rule.
What do I need to do? You will need to start tracking hours for part time employees as of January 1, 2021. Most payroll providers have the ability to track those hours for you. In addition, you will also need to report these hours to Paragon with your year-end census request so that we can help verify eligibility for the LTPT employees on an annual basis.
We expect more guidance to come on how to track the hours. Most LTPT employees are paid hourly, which facilitates tracking the hours. If you have some LTPT employees where you are not tracking hours, then an equivalency method defined in your plan document would most likely need to be used. For instance, under the equivalency method, you would credit the LTPT employees with 190 hours for any month where they worked at least one day.
How will this impact my Plan? Employees who are eligible due to the 3 year/500-hour requirement can be excluded from nondiscrimination, coverage and top-heavy testing. Additionally, these employees are not required to receive Employer contributions. However, an Employer may choose to give these employees Employer contributions as well. These employees will be credited with a year of service for vesting purposes if they work 500 hours in a year rather than the more typical 1,000 hours. This includes years prior to 2021, which is a little different from the eligibility requirement. Employers will need to pay attention to this even if they do not give employer contributions to a LTPT employee because that person could become an employee working 1000 hours or more in the future.
Another item of particular interest will be to review your Plan’s procedures for cash-out distributions, lost participants, and uncashed checks. We expect this provision for LTPT employees to create additional small balances in your plan. The impact could be substantial to an Employer with a lot of part time employees falling into the LTPT category. It is imperative to make sure you are following the cash-out distribution rules of your plan to force out small vested balances under $5,000. It is also important to make sure you track employee contact information, such as mailing address, phone number, email address, and beneficiary information, and keep it current. These LTPT employees will need to receive required plan notices and participant statements.
Stay tuned as we expect more guidance to come in regards to LTPT employees, such as how LTPT employee classification will affect Form 5500 participant counts. If you have any questions or concerns, please reach out to your Paragon consultant.