- May 2, 2023
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The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act became law in December of 2019 and dramatically changed the laws regulating tax-qualified retirement plans. Since then, a package of retirement plan related bills were added to a huge omnibus spending bill in December of 2022 and nicknamed “SECURE 2.0”. SECURE 2.0 seems to be the primary focus of everyone in the retirement plan industry these days…as it should. However, it is important to remember that some aspects of the “original” SECURE Act are extremely impactful and have not yet become effective.
This article is focused on one such issue that will dramatically alter eligibility for 401(k) plans. More specifically, the impending requirement to allow “long term part-time employees” (“LTPTE(s)”) to defer their salary into 401(k) plans. For most plan sponsors, this new requirement will become effective January 1, 2024 and it could require them to allow previously ineligible employees to participate in their 401k plans. Therefore, it is critical for retirement plan sponsors to both understand this requirement and review the necessary data now to ensure that they are ready to operate in accordance with this new obligation as soon as the first day of 2024.
Reduced Eligibility Requirements for Long-term, Part-time Employees
Most plan sponsors understand the eligibility service requirements that apply to their employees under the Internal Revenue Code and the Employee Retirement Income Security Act (“ERISA”). Under the current pre-SECURE Act rules, a plan sponsor generally can restrict retirement plan participation to only those employees who accrue at least 1,000 hours of service during a 12-month eligibility period in order to achieve one “year of service” (“One Year of Service Rule”). However, the SECURE Act dramatically changed the application of the One Year of Service Rule … but only in connection with a 401(k) elective deferral feature.
Effective for plan years beginning after December 31, 2020, employees with at least 500 hours of service in three consecutive 12 month periods must be permitted to make elective deferrals under a 401(k) defined contribution plan. This change to the service eligibility rules does not impact the age eligibility rules. Thus, requiring the attainment of age 21 in order to be allowed to make elective deferrals into a 401k plan is still permitted.
To reiterate, the new SECURE Act eligibility provision only applies to an elective deferral feature of a 401(k) plan. Thus, a plan sponsor who is forced to allow LTPTEs to defer a portion of his or her salary into a 401(k) plan in this manner could continue to restrict the same employee from receiving an employer matching or profit sharing contribution until such individual satisfied the “normal” One Year of Service Rule. In addition, the LTPTEs who are allowed to defer a portion of their income are excluded from the nondiscrimination, minimum participation, top-heavy and coverage requirements that might otherwise apply. Therefore, in general, the ability of the LTPTEs to defer as a result of this exception will not hurt the plan sponsor due to any otherwise applicable mandatory compliance testing requirement.
Finally, and most importantly for purposes of this article, the first 12-month period used to measure the completion of 500 hours of service in order to determine whether a LTPTE has accrued 500 hours of service in three consecutive 12 month eligibility periods begins no earlier than January 1, 2021. Thus, under the new rule, the absolute earliest that an LTPTE could accrue three consecutive 12 month eligibility periods with at least 500 hours of service would be December 31, 2023 which would then trigger an initial participation date of no earlier than January 1, 2024. January 1, 2024 is now less than one year away. Therefore, it is critical for plan sponsors to begin collecting and analyzing the relevant payroll and employment data from 2021 and 2022 now in order to be prepared for this significant change to the eligibility rules in 2024.
SECURE 2.0 Further Reduces Long-term, Part-time Employee Eligibility
We mentioned SECURE 2.0 at the beginning of this article. For better or worse, the broad impact of SECURE 2.0 included a further reduction to the LTPTE rules imposed under the SECURE Act. In this regard, SECURE 2.0 reduced the three year period during which an employee accrued at least 500 hours of service to a two year period during which an employee accrued at least 500 hours of service. However, this rule change will not go into effect until plan years beginning after December 31, 2024. Therefore, the earliest that an LTPTE must be allowed to defer to a 401k plan under the revised SECURE 2.0 rule would be January 1, 2025.
To be clear, the SECURE 2.0 rule adjustment does not alter a plan sponsor’s obligation to comply with the SECURE Act LTPTE rules for 2024. Consequently, in general, the SECURE Act “three year” rule will apply for 2024. However, effective for 2025 and into the future, the SECURE 2.0 “two year” rule will apply.
We hope that this article helped you to better understand this topic and encouraged plan sponsors to begin to act now to collect the necessary data to remain compliant with the new law. However, please be advised that this article is not intended to serve as financial, tax or legal advice so it should not be construed as such. If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.