2024 Brings New Rules for Long-Term, Part-Time Employees
Plan sponsors are facing new considerations with the inclusion of long-term part-time (LTPT) employees in 401(k) plans. Here are some highlights of the essential aspects plan sponsors should address to ensure compliance and effective administration:
Implementing Plan Administration Changes:
Plan sponsors must comply with new requirements for plan years starting on or after Jan. 1, 2024. While written plan amendments are not due until the end of the 2025 plan year, it’s crucial to initiate the necessary changes now. The recently proposed IRS regulations offer guidance for plan sponsors, allowing reliance on them until final regulations are published.
Identifying LTPT Employees:
Recognizing LTPT employees involves identifying individuals aged 21 and above who have completed at least three consecutive years of service, with a requirement of 500 hours worked. For plan years starting before Jan. 1, 2021, these are not considered. Effective from Jan. 1, 2025, the 500-hour service requirement decreases to two consecutive years. Plan sponsors should ensure timely tracking of employee hours and eligibility determinations, considering historical payroll records if necessary.
Catch-Up and Roth Deferrals:
While not mandated, plan sponsors may choose to allow LTPT employees to make catch-up contributions and Roth elective deferrals for administrative simplicity.
Employer Contributions for LTPT Employees:
Employers have the option to make matching or employer contributions for LTPT employees but are not obligated to do so. Safe harbor plans may exclude LTPT employees from receiving safe harbor contributions, maintaining their status. Plan sponsors should have reviewed and aligned their administration methods by the first of this year.
Special Vesting Rules:
LTPT employees are fully vested in their elective deferrals. However, if employer contributions are provided, special vesting rules may apply. Notably, years before Jan. 1, 2021, can be disregarded for vesting purposes. Employers should carefully consider vesting service-crediting rules to ensure fair treatment of former LTPT employees.
Exclusion from Nondiscrimination Testing:
Employers may exclude LTPT employees from annual nondiscrimination testing, but this requires a formal election, clear communication in plan documents, and uniformity in the exclusion.
Elapsed Time Plans and 403(b) Plans:
Elapsed time plans, which count service based on time rather than hours, generally fall outside these rules. The SECURE 2.0 Act extends LTPT eligibility to ERISA-covered 403(b) plans from the 2025 plan year onward.
Next Steps for Plan Sponsors:
While plan amendments are not mandatory until the last day of the 2025 plan year, plan sponsors must meet operational compliance from the 2024 plan year onward. Plan sponsors should collaborate with legal counsel and plan administrators to ensure a thorough review of their plans, aligning them with the new LTPT requirements.
In this evolving landscape, understanding and implementing these considerations can not only ensure compliance, but also contribute to a seamless retirement planning experience for all employees.