The SECURE Act of 2019 (the “2019 Act”) and the SECURE 2.0 Act of 2022 (the “2022 Act”) made many significant changes to retirement plans and how they operate. Several provisions became effective immediately while others were deferred and will phase in over time. Although an amendment reflecting these changes is generally not required before the end of the 2025 plan year, plans must be operated in compliance with the changes as they become effective.
Some changes that become effective for plan years beginning in 2024 and later will be implemented automatically by service providers. However, some sponsors will need to start planning now for an important change that will apply to many plans effective as of January 1, 2024. We are sending this alert now to give ample time to prepare for, and comply with, this new provision by the January 1, 2024, effective date.
The 2019 Act (Div. O, section 112) requires 401(k) plans to allow long-term, part-time employees (“LTPT employees”) to make salary deferral contributions. The 2022 Act extends this requirement to 403(b) plans, starting in 2025. LTPT employees are employees, other than collectively bargained employees, who are credited with more than 500 hours of service in three 12-consecutive month periods, excluding 12-month periods beginning before 2021, and who have met the plan’s age requirement. Employees who meet these requirements may enter a 401(k) plan as early as January 1, 2024, for calendar year plans. The existing rules for measuring 12-consecutive month periods for eligibility and for determining entry dates apply when determining eligibility and entry dates for LTPT employees.
LTPT employees do not have to receive any employer contributions, including safe harbor contributions, unless they otherwise satisfy the eligibility requirements for such contributions under the terms of the plan. However, if they are allocated employer contributions, they must be credited with a year of vesting service for each year in which they complete at least 500 hours of service even if the plan requires 1,000 hours of service for other employees.
LTPT employees are excluded from coverage and nondiscrimination testing, and are not included for purposes of the top-heavy requirements.
For a plan that already allows any employee to make salary deferral contributions, little will change. Due to the new vesting rule, however, sponsors may need to monitor vesting service for LTPT employees if they are allocated employer contributions that are subject to a vesting schedule. The new vesting service rule for LTPT employees applies only if such employees become participants because they are LTPT employees; thus, if employees are not restricted from participating based on an hours-based requirement, any employer contributions allocated to their accounts can be made subject to the plan’s regular vesting schedule.
For plans that exclude part-time and/or seasonal employees (unless they complete 1,000 hours of service), we recommend reviewing employment records for 2021, 2022 and 2023 well before the January 1, 2024, effective date to identify any employees who may qualify as LTPT employees. If any employees meet the new requirements, they will need to be provided with information about the plan and enrollment materials.
The 2022 Act, (Division T, section 125) changes the LTPT employee rule under the 2019 Act. Under the 2022 Act, LTPT employees must be allowed to make salary deferral contributions to 403(b) plans as well as to 401(k) plans. The 2022 Act also reduced the lookback period from three to two 12-consecutive month periods with more than 500 hours of service, excluding, for the new two-year rule, 12-month periods beginning before 2023. Employees who meet these requirements and the plan’s age requirement may enter a plan as early as January 1, 2025.
Although the new rules seem straightforward, there are many open questions that will need to be addressed. For example: What alternatives might be available for employers that do not track actual hours? Does the new rule apply to employees who are excluded from participating as a member of an excluded classification not based on service but who nonetheless complete at least 500 hours of service? For 403(b) plans, what is the effect on universal availability and the student employee exclusion? We do not believe the new laws are intended to override the existing excluded classification rules that are not hours- or service-based, but further guidance is needed.
As previously noted, many more provisions of the new laws will become effective over the next few years, and very little guidance has been issued at this time. We will continue to provide information about these legal changes as they become effective and explain any actions plan sponsors may need to take. If you have any questions or concerns about how the new requirements will affect your plan, please feel free to contact us for assistance.