New Requirement to Cover Long-Term Part-Time Employees in 401(k) Plans Enters Into Effect
Under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act of 2019) and the SECURE 2.0 Act of 2022 (collectively, SECURE), long-term, part-time (LTPT) employees must be allowed to make contributions into their employer’s 401(k) plan beginning this year (2024).
New Mandate
Prior to the SECURE Acts, retirement plans could exclude employees who worked fewer than 1,000 hours per year. To improve access to workplace retirement plans, the 2019 SECURE Act required 401(k) plans to allow employees who have worked at least 500 hours in three consecutive years (from January 1, 2021, onward) to make their own contributions to the plan. For employees who have worked at least 500 hours but less than 1000 hours in 2021, 2022, and 2023, those employees must be allowed to make their own contributions into the 401(k) plan starting with the first plan year beginning on or after January 1, 2024. For plan years beginning in 2025 and after, SECURE 2.0 reduces the requirement down to two years of service.
Why Should a Plan Sponsor be Concerned?
There may be some increased cost to the plan sponsor due to having to include LTPT employees in the 401(k) plan. Plan Sponsors should consider the following potential increased costs:
Increased Plan Audit Expense - LTPT employees who participate in the plan must be counted when determining if the 401(k) plan must have an annual independent audit. 401(k) plans that have more than 100 participant accounts as of the first day of the plan year must have an annual independent audit.
Increased Plan Administration Costs – The LTPT employee is a new category of participant that must be tracked and new procedures may be needed to stay in compliance with the requirements.
Costly Corrective Actions – If an eligible employee is not given notice that they are eligible to participate in the plan, the plan sponsor must take steps to correct the error. While corrective contributions are not always required, a participant notice would need to be provided to advise them that their future contributions might need adjustment due to the delay in them making contributions to the plan.
Decreased Forfeitures – For the year 2021 and after, LTPT employees earn vesting credit for each year they work at least 500 hours but less than 1,000 hours. There will be no impact on vesting in which the plan sponsor does not make contributions for the employee, vesting for LTPT employees does carry over to any future years in which they are eligible for employer contributions.
Operational Compliance Before Plan Amendment Deadline - SECURE provides that the written plan document is not required to be amended until the end of the 2025 plan year. However, since the LTPT rules took effect starting this year (2024), the 401(k) plan would need to be operated with those rules starting in 2024, even though a formal, written plan amendment is not required until the end of the 2025 plan year.
One option that plan sponsors could consider to reduce the risk associated with LTPT employees is to lower the 1,000-hour requirement to not more than 500 hours to make salary deferrals under the plan. While, SECURE provides numerous exceptions for LTPT employees in regards to coverage, nondiscrimination, and top-heavy tests, avoiding LTPT employee status potentially could be more cost-effective. Plan sponsors will want to discuss any potential changes with their 401(k) advisor and Third Party Administrator (TPA) to understand the full ramifications of any proposed changes.
Tony Powers, AIF®, CFP®, CRPS® Shareholder
Tony Powers, President of KerberRose Wealth Management, has more than 20 years of experience in the financial services industry. He specializes in helping private and public sector employers set-up and manage their employee retirement plans. Tony provides Fiduciary Services and Support, Plan Design Consultation, Plan Benchmarking and Financial Wellness.