The Impact of the SECURE Act on Long-Term, Part-Time Employees

Prior to the SECURE Act of 2019 and SECURE 2.0 Act of 2022 (collectively, the SECURE Act), employers could exclude employees from their tax-qualified defined contribution plans based on the number of hours they worked per year. Typically, this meant that part-time employees (i.e., those working less than 1,000 hours per year) were not eligible to contribute, regardless of their years of employment.

To expand retirement savings plan access to more individuals, the SECURE Act required 401(k) plans to allow employees who have worked at least 500 hours in three consecutive years (commonly called “long-term part-time employees” or “LTPTs”) to make elective deferrals to the plan starting with the first plan year beginning on or after January 1, 2024. So, if an employee had 500 hours of service in 2021, 2022, and 2023, they must be permitted to make salary deferrals into their employer’s 401(k) plan starting with the first plan year beginning on or after January 1, 2024, even if they did not have 1,000 hours of service per year. As stated in the IRS Employee Plans Newsletter issued on January 26, 2024, the three-year measurement period is reduced to two years for plan years beginning in 2025 and later.

The impact of the LTPT rules on 401(k) plans may be significant. The following are several key considerations for employers and plan sponsors.

• Eligibility – Ensure eligible LTPT employees are properly included in the 401(k) plan. As noted above, for plan years beginning in calendar year 2024, an employee becomes eligible to contribute elective deferrals to the plan if they have three consecutive 12-month periods with at least 500 hours of service in each. The eligibility determination does not include periods before January 1, 2021. For plan years beginning in calendar year 2025 or later, the measurement period is reduced to two years.
• Employer contributions – The LTPT rules do not require employer matching or non-elective contributions for LTPT employees; however, they are permitted. Note that a plan amendment may be needed.
• Vesting – If an LTPT employee transitions to normal participation, they receive one year of vesting service for each computation period in which they worked at least 500 hours prior to the change.
• Excluded class – An employee who would otherwise be classified as an LTPT employee may be excluded from the plan if they belong to an excluded employee class (e.g., individuals under the age of 21).

In addition to the administrative aspects of the LTPT rules discussed above, there may also be increased costs to consider.

• Plan audit expenses – The additional participants due to LTPT employee status must be counted when determining if the 401(k) plan must have an annual independent audit of the plan’s financials.
• Increased plan administration costs– The time spent by the plan sponsor and its service providers increases as the number of plan participants increases, especially if recordkeeping for a new category of participants is necessary.
• Costly corrective actions– The employer must take steps to correct any instance that an employee that is eligible to make elective deferrals was not notified of their eligibility. In addition, many administrative systems are not ready for the implementation of the LTPT rules. Any delay in communicating the eligibility to LTPT employees that causes a delay of payroll deductions of elective deferrals beyond their eligibility date may require corrective action(s).
• Decreased forfeitures– LTPT employees earn vesting credit for each year after 2021 during which they work at least 500 hours but less than 1,000 hours. While the vested percentage has no impact on the years the employer does not make contributions on the employee’s behalf, vesting as an LTPT employee carries over to any years that the employee becomes eligible for employer contributions.
• Operational compliance – For a 401(k) plan to be qualified, it must comply with regulatory and statutory requirements. The plan document is not required to be amended for the SECURE Act until the end of the 2025 plan year; however, the plan must operate in compliance with the applicable changes in the law for all plan years, starting with the effective date of the change.

Employers and plan sponsors should work closely with their service providers and legal counsel to ensure their plans are in compliance with the updated LTPT rules. This includes amending the various plan documents, updating plan procedures and processes, and modifying communication strategies to accommodate the expanded pool of eligible part-time employees.

Please contact us if you have questions about the information outlined above; our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more on our Employee Benefit Plan services page.

About the Author

Related Services