How Long-Term, Part-Time Employees Affect Your Retirement Plan
By Bill Ellis, QKA®
When might an employer need to consider long-term, part-time employees for eligibility purposes?
In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act changed eligibility requirements so that employees who are credited with at least 500 hours in three consecutive years (beginning on January 1, 2021), must be allowed to participate under a 401(k) plan’s salary deferral provision. In 2022, the SECURE 2.0 Act (SECURE 2.0) reduced the wait from three years to two, effective for plan years that begin after December 31, 2024. In addition to meeting this hours-of-service requirement, the employee must attain age 21 by the last consecutive 12-month period and must not have become eligible to participate by meeting other eligibility conditions.
Employers that use either the actual hours of service method or the equivalency hours of service method are required to abide by the proposed LTPT regulations (released in December 2023), crediting employees with the normal number of hours under the applicable equivalency method. Employers who use the elapsed time crediting method, however, will not have eligible LTPT employees because they track the passage of time, not hours, and full or part-time employees are treated equally for eligibility purposes.
Once an LTPT employee meets the eligibility requirements, he must enter the plan on the earlier of
the first day of the first plan year beginning after the date that the employee satisfies the eligibility requirements, or
six months after the date that the employee satisfies the eligibility requirements.
What if an LTPT employee becomes a full-time employee?
LTPT employees will be considered “former” LTPT employees as of the first day of the plan year beginning after the earlier of
the plan year in which the employee is credited with at least 1,000 hours during a 12-month period; or
the plan year in which the employee becomes an ineligible employee (due to an eligibility requirement other than age or service, such as becoming part of an excluded class of employees).
Are employers obligated to provide employer contributions to LTPT employees who become eligible to participate in the plan as an LTPT employee?
While employers can make LTPT employees eligible to receive employer contributions, they are not required to amend their plan to offer employer contributions to LTPT employees.
An employer may choose to exclude LTPT employees from several compliance tests—including the nondiscrimination requirements under IRC Sec. 401(a)(4), the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests, ADP and ACP safe harbor provisions, and the 410(b) minimum coverage test. If the employer does not elect to exclude LTPT employees, those employees generally will be labeled as otherwise excludable employees for purposes of IRC Sec. 410(b)(4)(B), requiring this group to be tested for coverage separately. Employers may also exclude LTPT employees from the application of the top-heavy test’s vesting and minimum benefit requirements.
How would vesting apply to LTPT and former LTPT employees?
LTPT employees and former LTPT employees will be credited with one year of vesting service for each year that they are credited with at least 500 hours during a 12-month vesting computation period. Employers must separately track LTPT employees for vesting purposes because they can be credited with vesting service under the LTPT vesting provisions and the standard vesting provisions contained in the plan document.
Would an employee still be eligible to enter the plan as an LTPT employee if she were part of an excluded class of employees?
In general, employers may continue to place employees into excluded classes so long as it fits within a reasonable business classification. Employees that are placed into excluded classes may not become eligible to participate in the plan until they are removed from the excluded class, at which point the employer may calculate the employee’s eligibility based on the employee’s original hire date. Employers may not place employees into an excluded class that is structured in a way to indirectly impose age or service requirements that extend beyond the LTPT employee eligibility requirements. Additionally, proposed LTPT regulations do not apply to union employees or to nonresident aliens with no US income. So even if an employer doesn’t exclude union or nonresident alien employees, if those employees meet the service requirement to be an LTPT employee, they wouldn’t be considered an LTPT employee and would still have to meet the plan’s standard eligibility requirements in order to participate.
How do the LTPT rules affect 403(b) plans?
Effective for 2025 and later plan years, SECURE 2.0 expands applicability of the LTPT rules to ERISA 403(b) plans. In October 2024, the IRS released Notice 2024-73, providing guidance on employees who are referred to as “ERISA LTPT employees.” An ERISA LTPT employee is defined as an employee who participates in an ERISA 403(b) plan and meets the definition of an LTPT employee provided by Section 125 of SECURE 2.0 and ERISA Section 202(a)(1).
Notice 2024-73 confirms that the statutory exclusion for part-time employees who work less than 20 hours per week is based on service and not classification, and so those part-time employees who qualify as an ERISA LTPT employee should be offered the ability to defer into the plan upon meeting the LTPT requirements. However, the 403(b) exclusion for a student employee whose service is “incident to, and for the purpose of, pursuing a course of study” is still available, and those individuals can be excluded even if meeting LTPT conditions.
For non-ERISA 403(b) plans, LTPT employee provisions detailed in Section 125 of SECURE 2.0 and ERISA Section 202(a)(1), do not apply and can be disregarded—unless that plan becomes subject to ERISA.
