The SECURE Act (OG SECURE – enacted in December 2019) and SECURE 2.0 (S2 – enacted in December 2022) create new rules to accelerate plan eligibility for so-called long-term, part-time (LTPT) employees. On Black Friday with a whopping 5 weeks until the rules take effect, the Treasury Department issued proposed regulations to provide some long-awaited guidance on implementation.
In Part 1 of this post, we delved into determining when an employee qualifies as LTPT, triggering accelerated plan eligibility. In this post, we will explore the types of contributions available to these employees as well as how to apply the vesting and nondiscrimination testing requirements.
Contributions – Employee Deferrals
I know that LTPT employees must be allowed to defer from their own paychecks. Can I limit the amount they can defer?
This one is a little bit “yes” and a little bit “no”. Of course, the legal contribution limits always apply, so a LTPT employee cannot defer more than 100% of his or her pay or more than the IRS deferral limit ($23,000 for 2024, indexed for inflation). Also, if the plan applies an overall deferral limit such as 75% of pay, that limit can also apply to LTPT employees.
On the other hand, it is not possible to unduly limit LTPT deferral rates in a way that would preclude them from receiving other plan benefits.
Do we have to allow LTPT employees to make catch-up contributions if they are age 50 or older?
Nope. While administrative simplicity would likely suggest consistency here, it is possible to allow “regular” employees who are at least age 50 to make additional catch-up contributions while precluding LTPT employees from doing so. However, you would also have to elect to exclude the LTPT employees from nondiscrimination testing in order to do this. More on that later.
What about Roth deferrals? Can we give LTPT employees the ability to make both pre-tax and Roth deferrals?
This is optional. As with catch-up contributions, allowing Roth contributions across the board would likely make for greater administrative simplicity, but you do have the option to limit Roth deferrals only to your “regular” participants and require that LTPT employees defer only as pre-tax.
Contributions – Company Match and Profit Sharing
Allowing LTPT employees to contribute for themselves is fine. Are we now required to make matching and profit sharing contributions for them as well?
No. While you are permitted to make company contributions on behalf of LTPT employees, there is no requirement to do so. The new rule applies only to employee salary deferrals.
I have a safe harbor 401(k) plan and I was previously told that if I allow employees to defer right away but make them wait for a year to get the safe harbor match, I would lose some of the safe harbor benefits. Is that the case here?
The good news here is that the LTPT rules do not blow up your plan’s safe harbor status at all. While previous rules created a situation in which splitting eligibility in a safe harbor match could trigger a mandatory top-heavy contribution, S2 took care of that. Now, a safe harbor match plan can safely split its eligibility (including to comply with the LTPT rules) to allow for more immediate salary deferrals while still requiring employees to satisfy 1 year of service to be eligible for the safe harbor match.
The previous question referred to the top-heavy minimum contribution. If my plan is top heavy, do I have to make that contribution for LTPT employees?
Another resounding “Nope.” The new rules specifically allow you to carve out LTPT employees with respect to the required top-heavy minimum contributions. We should note, however, that the account balances of LTPT employees are counted when calculating the plan’s top-heavy ratio even though those employees do not have to receive the top-heavy minimum contribution if the plan is top heavy.
Vesting
If LTPT employees never work more than 1,000 hours in a year, do they ever become vested?
Indeed, they do. When it comes to LTPT employees, the vesting rules are pretty much the same as for “regular” employees with two important exceptions.
- All years prior to January 1, 2021, are disregarded when it comes to vesting.
- A LTPT employee only has to work 500 hours in a year to receive vesting credit for that year.
One thing that is interesting, however, is that any employee who first joins the plan as a LTPT employee will forever have his/her vesting determined this way…even if s/he eventually satisfies year-of-service requirement to become a “regular” participant. That means someone working only 500 hours per year could vest more quickly than someone who works 1,000 in his/her first year and then drops below that in subsequent years. If that doesn’t make you say “Bah Humbug” I don’t know what will.
Wait…why do I care about vesting if I don’t have to make company contributions?
Great question, and there are 2 answers. One is that a LTPT employee could eventually work enough hours to become a “regular” plan participant and thus, eligible to share in any company contributions at that time. Second is that, although companies are not required to make contributions on behalf of LTPT employees, they have the option to do so. In either event, it would be necessary to determine vesting.
Can I use the same 12-month period to review vesting for LTPT employees that I use for my “regular” participants?
Yes. The proposed regulations allow you to use any vesting computation period that would normally be permitted.
Nondiscrimination Testing
Most of these LTPT employees probably won’t contribute much, if anything. Do I have to include them in the annual ADP test?
We don’t blame you for asking this question. Fortunately, you do not have to count them in the ADP or ACP tests.
If we don’t have to make company contributions on their behalf, does that mean we can also disregard them for our other nondiscrimination testing?
Yup. You can elect to disregard LTPT employees from all of your annual nondiscrimination testing, but there are several caveats we should mention.
- A plan sponsor must make a formal election to exclude LTPT employees from testing.
- If a plan is a safe harbor plan, the election to exclude LTPT employees from those provisions must be formally reflected in the plan document.
- It is not possible to exclude some LTPT employees but not others.
- It is an all-or-nothing election. If you exclude LTPT employees for one test, you must exclude them for all tests.
What happens if we choose to make company contributions for LTPT employees? Do we void our ability to exclude them from testing?
This post is one where we are glad we get to keep saying “No.” If you decide to make a match or profit sharing contribution for your LTPT employees, you can still disregard them for testing purposes. Being more generous than required does not limit that exclusion.
If a LTPT employee satisfies the requirement to become a “regular” participant, when do I have to include them in testing?
The proposed regulations indicate that you must include a former LTPT employee, starting with the first day of the first plan year on/after the employee satisfies the one-year-of-service eligibility requirement.
Other Details
Do we have to amend our plan to document any of this?
Yes, eventually. S2 says that you must amend your plan no later than the end of the 2025 plan year to reflect not only these provisions but also any others that are part of either OG SECURE or S2. However, you are required to operate your plan in accordance with the LTPT rules as of January 1, 2024 (well, technically, the first day of your 2024 plan year).
What about our Form 5500? Do we have to count LTPT employees in determining whether we have to hire a CPA to audit the plan each year?
Another great question and one for which we don’t yet have an answer. Earlier this year, the Department of Labor updated the rules to base the audit threshold on the number of participants with balances rather than the number who are eligible. The newly proposed regulations we’ve discussed here are from the Treasury Department, which is a completely separate agency than DOL. The proposed regs specifically indicate that any determinations with respect to the Form 5500 are outside of their scope and within the purview of DOL, so we will have to wait and see.
There are numerous references here to these rules being “proposed.” What does that mean?
Generally speaking, government agencies are required to publish regulations in proposed form to give the public opportunity to comment on them before finalization. Sometimes, however, the agency will say that the public is allowed to rely on the proposed version in the interim before the final regulations are published. That is what is happening here. The Treasury Department has given the public until March 2024 to provide comments. It will then consider those comments before finalizing the rules. We are allowed to rely on the proposed rules in the meantime. If they make any changes in the final version, those changes will only apply prospectively.
There you have it. It’s not the most complex of all the S2 provisions, but there are plenty of moving parts. If you have any questions about how these new rules apply to your plan, give us a call.
For more information, please visit our SECURE 2.0 Act Resource Page.
