IRS proposes regulations for long-term part-time employees

On November 24, the IRS issued its long-awaited proposed regulations for long-term part-time employees, or LTPTEs. Until the final rules are issued, employers who sponsor retirement plans should follow these proposed regulations; here, we’ll go through some of the highlights of what the IRS released.

First, some background

The SECURE Act of 2019 requires that LTPTEs be allowed to participate in the elective deferral portion of a 401(k) plan beginning in 2024. An LTPTE is an employee who is credited with at least 500 hours of service in three consecutive years (disregarding years that began before January 1, 2021).

The SECURE 2.0 Act of 2022 made two changes to the LTPTE rules that will be effective in 2025. First, the three consecutive years will be reduced to two consecutive years. Second, the LTPTE rules will apply to ERISA 403(b) plans, but disregarding years that began before January 1, 2023. Here are some examples of SECURE vs. SECURE 2.0 regulations:

• SECURE Act example: An employer’s calendar year 401(k) plan provides for elective deferrals and matching contributions. An employee must complete one year of service (i.e., at least 1,000 hours of service in a year) to be eligible to participate in the plan. If an employee is credited with 600 hours of service in 2021, 2022, and 2023, even though they have not met the plan’s one year of service eligibility rule (because they never completed 1,000 hours of service in a year), they will be eligible to participate in the elective deferral portion of the plan as an LTPTE effective January 1, 2024. This is because they were credited with at least 500 hours of service in three consecutive years.
• SECURE 2.0 example: This example uses the same facts as above, except the employee is credited with 400 hours of service in 2023. In this case, they will have two consecutive years of service (i.e., 2021 and 2022) with at least 500 hours of service in each year. Accordingly, they will be eligible to participate in the elective deferral portion of the 401(k) plan as an LTPTE effective January 1, 2025.

Newly proposed IRS regulations

With that context in mind, let’s take a look at some of the key aspects of the proposed LTPTE regulations released by the IRS.

• Job classification exclusions. The proposed regulations permit job classification exclusions if the exclusion is not a disguised age or service exclusion. For example, assume a 401(k) plan excludes hourly workers from participating in the plan. In this example, even if an hourly worker completed 500 hours of service in three consecutive years, they would not be considered an LTPTE. Accordingly, the plan can continue to exclude the hourly worker from the elective deferral portion of the plan.
• Excluding part-time, temporary, seasonal employees. Some plans exclude “part-time, temporary, and seasonal employees” from participating in a plan. This exclusion is not permitted under the proposed regulations. This means that if a part-time, temporary, seasonal employee satisfies the LTPTE definition, they must be allowed to participate in the elective deferral portion of the 401(k) plan.
• LTPTEs not required to receive employer contributions. LTPTEs must only be permitted to participate in the elective deferral portion of a plan. Employers are not required to give employer contributions to LTPTEs. For example, if a plan requires 1,000 hours of service in a year to be eligible to participate in the matching contribution portion of the plan, as long as the LTPTE never completes 1,000 hours of service in a year, the LTPTE will not receive a matching contribution.
• 500 hours of service for vesting purposes. The proposed regulations confirm that if an employer contribution is provided to an LTPTE, they will receive a year of vesting service if they complete at least 500 hours of service in a year. Plans typically require employees to complete 1,000 hours of service in a year for vesting purposes. An LTPTE, though, only needs to complete 500 hours in a year for vesting purposes. In this case, if the employer provides employer contributions to LTPTEs, there would be two sets of vesting rules — one for LTPTEs (500 hours of service in a year) and one for non-LTPTEs (1,000 hours of service in a year). If you are thinking about providing employer contributions to LTPTEs, talk to your Relationship Manager at UBT for more information.
• Avoiding LTPTE rules. Employers can avoid the LPTE rules by adopting eligibility rules that are more liberal than the 500 hours of service for three straight years rule. For example, a plan may allow for immediate eligibility to participate in the elective deferral portion of the plan. In this case, there will never be any LTPTEs, thus relieving the need to monitor whether any employees complete 500 hours of service for three straight years.
• Nondiscrimination testing/top-heavy rules. The proposed regulations also confirm that LTPTEs can be excluded from nondiscrimination testing, and that an employer is not required to provide top-heavy contributions to LTPTEs.

This is a lot of information to process, to be sure — but your friends in UBT’s Retirement Plan Services department are here to help. If you have any questions about how the LTPTE rules apply (or don’t apply!) to your plan and workforce, please reach out to your Relationship Manager and they’ll be happy to assist you.