Is My Employee Long-Term or Part-Time for Our 401k Plan? How Does This Affect Me?
The Setting Every Community Up for Retirement Enhancement (SECURE) Act resulted in a significant change to the definition of a part-time employee. In the past, employees working less than 1,000 hours in a plan year could be excluded from the plan, if elected by the Plan’s eligibility requirements. The SECURE Act establishes the new concept “long-term, part-time employee” (LTPT) for plan years beginning after December 31, 2020.
LTPT is an employee that has worked more than 500 hours, but less than 1,000 hours for three consecutive years and meets the Plan’s age eligibility requirements. Plans have time to prepare for this change – only plan years beginning after December 31, 2020 are counted for the three-year eligibility requirement. Although LTPTs do not become eligible until plan years beginning after December 31, 2023, plans must start tracking LTPT hours now to ensure proper compliance in 2024. Furthermore, the SECURE Act allows plans to let LTPTs into the plan before the end of the three-year period.
In addition, the Internal Revenue Service (IRS) also issued Notice 2020-68 about the SECURE Act, noting that for vesting purposes, all years in which the LTPT worked over 500 hours but less than 1,000 hours must be counted, even prior to December 31, 2020. However, the employer can still require 1,000 hours to be eligible for the company match and profit share.
Plan sponsors should consider the following:
- Should the Plan allow LTPT employees to receive a match/profit share?
- Should the Plan be amended to revise the Plan’s vesting requirements?
- Should the Plan allow LTPT employees into the plan sooner than the eligibility period noted above?
It is important that plan sponsors start tracking hours for part-time employees. Plan sponsors should also work with their third-party administrators and counsel to ensure that plan amendments are made. Taking necessary actions now, and possibly making changes to the Plan, could prevent future mistakes.
This article was co-authored by Austin Eichacker and Kyle Kopren, Senior Managers in the audit department.