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IRS Proposes Long-Term Part-Time Employee Rule

19 Dec

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Update Applicable to:  Effective date
All employers  January 1, 2024 – will apply until other guidance is issued or until final regulations are done.  
January 1, 2025 – actual amendments to the plan to reflect these new rules can be incorporated until the last day of the 2025 plan year (December 31, 2025, for calendar year plans).  
January 26, 2024 – last day the IRS will receive comments on the proposed rule.  
March 15, 2024 – Scheduled hearing at 10 a.m. ET.

What happened?

On November 27, 2023, the Department of Treasury and Internal Revenue Service released a proposed regulation providing much-anticipated guidance on the long-term part-time employee (LTPTE) rules that were first added to the tax code in 2019. These rules become effective for most 401(k) plans.

What are the details?

The following changes have been introduced in the SECURE ACT 2.0:

  • The service requirement for LTPTEs was reduced from 3 years to 2 years.
  • The LTPT provisions apply only to 401(k) plans. They do not apply to 403(b) plans or 457(b) plans, nor do they apply to collective bargaining units.
  • Employees are treated as LTPTEs only if they are eligible to participate in a plan solely as the result of meeting the LTPTE requirement:
    • A person has 500 hours of service during the required number of consecutive 12-month periods.
      • 3 years beginning in 2024.
      • 2 years beginning in 2025.
    • Are at least 21 years old at the end of consecutive 12-month periods.
  • Methods for counting hours of service as an alternative:
  • Exceptions:
    • If a plan has more generous eligibility criteria than required by the LTPTE rules
    • if a participant becomes eligible to participate in the plan after accruing 1,000 hours of service during a 12-month computation period
    • If a participant is covered by a collective bargaining agreement
    • If a participant is a nonresident alien with no U.S. earned income.
  • Plans may continue to exclude groups of employees based on their job classifications or other criteria, so long as the criteria are not a proxy for an impermissible age or service requirement, such as a part-time employee exclusion.
  • Must permit to begin making deferrals into a plan no later than
    • The proposed regulation clarifies that the first 12-month period begins on the first day that an employee accrues an hour of service.
    • The second 12-month period may begin on the anniversary of that date or on the first day of the next plan year.
  • Can be excluded from employer contributions, including matching or nonelective contributions under a safe harbor 401(k) plan.
    • If an LTPTE is permitted to receive employer contributions, those contributions are subject to a special vesting rule that requires service crediting for any year after 2021 in which the 500-hour requirement is met.

For comments regarding the proposed rules, follow the instructions provided here.

For additional details, review the resources provided below.


Business Considerations

  • Consider carving time to review the draft as well as the additional resources provided.
  • Consider amending your current provisions based on potential administrative impact to your organization.
  • Consider consulting an employment attorney or licensed retirement agent or insurance carriers to better understand how this impacts your business, as well as tailor solutions.
  • Consider leaving comments and/or attending the hearing regarding the rules.


Resources


Source References

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This communication is intended solely for the purpose of conveying information. The present post might incorporate hyperlinks directing readers to websites managed by third-party entities. The inclusion of any links within this communication is meant to serve as points of reference and could encompass opinion articles from various law firms, articles from HR associations, official websites, news releases, and documents of government agencies, and other relevant third-party sources. Vensure has no authority over these external websites and bears no responsibility for their content. Furthermore, Vensure does not endorse the materials present on these websites. The contents of this communication should not be interpreted as legal advice or as a legal standpoint concerning specific facts or scenarios. Nor should it be deemed an exhaustive compilation of facts potentially pertinent to federal, state, or local laws. It is strongly advised that employers solicit legal guidance from an employment attorney when undertaking actions in response to any legal updates provided. This is due to the possibility of future alterations occurring in federal, state, and local laws, regulations, as well as the directives and guidelines issued by governing agencies. These changes may transpire at any given time, potentially rendering certain portions of the content within this update void or inaccurate.

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