What to Know About New Retirement Plan Requirements for Long-Term Part-Time Employees

One of the most impactful provisions of SECURE 2.0 is the expansion of retirement plan coverage to long-term part-time (LTPT) employees, who have historically been underserved.

It is estimated seventeen percent of American employees work part-time, which equates to more than 25 million people. A large fraction of this group consists of long-term part-time (LTPT) employees, who consistently work in a part-time capacity for the same employer. LTPT employees have historically had limited access to company-sponsored retirement benefits, in part due to the often irregular or seasonal nature of their work schedules.

Recognizing the significance of this coverage gap and the evolving nature of the country’s workforce, the U.S. Congress passed significant legislation aimed at improving retirement plan access and participation in both 2019 and 2022. These bills are called the Setting Every Community Up for Retirement Enhancement (SECURE) Acts, or SECURE 1.0 and SECURE 2.0. Each SECURE bill contains provisions to address the retirement needs of LTPT employees.

Prior to the SECURE 1.0 Act, many part-time employees faced significant barriers in accessing employer-sponsored retirement plans, particularly 401(k) plans. The SECURE 1.0 Act began to change this by mandating that 401(k) plans cover qualifying LTPT employees starting in 2024. SECURE 2.0 built on these gains by lowering the length of service required to qualify and expanding the types of covered plans. A brief overview of LTPT coverage mandates and the criteria for determining LTPT qualifying status in both SECURE bills is below:

SECURE 1.0 LTPT Rules (2019):

• SECURE 1.0, which included a provision that 401(k) plans will be required to start covering LTPT employees, became law in December 2019.
• Under this provision, plan sponsors are required to extend the ability for qualifying LTPTs to defer into the company’s 401(k) retirement plan.
• To qualify for coverage, an LTPT must have 3 consecutive years of service with at least 500 hours per year. Years prior to 2021 could be excluded.
• Under the 3-year rule, the first batch of LTPT employees were sent to enter plans January 1, 2024.
• LTPT employees could be excluded from employer allocation, meaning that plan sponsors could decline to offer LTPTs a company match if they so wished.

SECURE 2.0 Expansion (2022):

For LTPT employees, these provisions represent a significant advancement in retirement security. Access to 401(k) and 403(b) plans allows these workers to save for retirement in a tax-advantaged manner, accumulating savings that can grow over time. The ability to participate in employer-sponsored retirement plans helps LTPT employees build a more robust financial foundation, contributing to their overall financial wellbeing.

Furthermore, the reduction in the service requirement from three years to two years under SECURE 2.0 means LTPT employees can start saving earlier, giving them a longer horizon to benefit from compounding returns. This change underscores the commitment to making retirement savings more accessible and equitable for part-time workers.

IRS Clarifications (2023):

Initially, guidance for the LTPT provisions of the SECURE bills was broad and not totally defined. On November 24, 2023, five weeks before the first LTPT employees were set to enter plans, the IRS released comprehensive guidelines to clarify the situation. Key highlights include the following:

Former LTPTs:

Former LTPT employees are defined as those who initially met the LTPT requirements but later meet the standard full-time eligibility criteria (1,000 hours in a year). These employees will continue to be credited with a year of vesting service for each year in which they work at least 500 hours, even after they are no longer classified as LTPTs.

Vesting:

Both LTPT and former LTPT employees’ vesting is calculated based on 500 hours of service per year. This can complicate calculations, as in a case where an employee accumulates three years of vesting before becoming a former LTPT.

Excluded Classes:

Plan documents often exclude certain classes of employees. SECURE 2.0 specifies that if these exclusions serve as a proxy to exclude LTPT employees, they may be invalid. For instance, excluding seasonal employees could be seen as excluding LTPT employees if their work patterns overlap.

Testing Exclusions:

SECURE 1.0 and 2.0 allow LTPT employees to be excluded from certain testing requirements if they are only allowed to defer. However, including one LTPT employee in testing means all must be included.

Top-Heavy Determination:

LTPT employees are included in top-heavy determinations but are not required to receive top-heavy minimum contributions if the plan document states this exclusion.

Implications for Employers

Employers sponsoring 401(k) and now 403(b) plans must prepare for the inclusion of LTPT employees by updating their plan documents and ensuring their payroll systems can track the required hours of service. It is also crucial for employers to communicate these changes effectively to their part-time workforce.

Employers should note that while SECURE 2.0 expands coverage to 403(b) plans, the requirements and obligations related to employer contributions remain consistent. Employers are still not mandated to make contributions to the retirement accounts of LTPT employees; the primary requirement is to allow these employees to contribute to the plan.

Understanding and implementing these LTPT provisions can be daunting. However, expanding access to retirement plans is ultimately beneficial for everyone involved. Employers should consider the following steps:

1. Review Plan Documents:

Confirm the eligibility provisions in your plan document. Ensure that your service requirements do not inadvertently exclude part-time employees.

2. Examine Employee Class Exclusions:

Verify if any class exclusions might be proxies for excluding LTPT employees. If your plan excludes certain employee classes by proxy, it might need adjustments to comply with SECURE 2.0.

3. Consider Third-Party Expertise:

If you find that your plan does exclude LTPT employees or are unsure, it is advisable to discuss this with your organization’s plan consultant. Each plan is unique, and tailored solutions may be necessary to ensure compliance and optimal plan operation.

By understanding these regulatory changes and leveraging expert advice, employers can better navigate the complexities of LTPT coverage, ultimately enhancing retirement plan inclusivity and compliance.

For more information on this topic, check out this on-demand webinar on how SECURE 2.0 provisions could impact your company-sponsored retirement plan.