The SECURE 2.0 Act of 2022 (SECURE 2.0) significantly changes the legal and administrative compliance landscape for U.S. retirement plans. Foley & Lardner LLP is authoring a series of articles that take a “deep dive” into key SECURE 2.0 provisions that will affect how employers structure and administer their 401(k) plans, pension plans, and other types of employer-sponsored retirement plans.
In our prior SECURE 2.0 articles, we’ve discussed student loans and 401(k) plan matching contributions, changes designed to simplify plan administration, changes to the minimum required distribution rules, and changes for small employer plans. In this article, we discuss how SECURE 2.0 expands access to 401(k) plan savings for certain long-term part-time employees.
We previously described the expansion of 401(k) plan access for long-term part-time employees in the February 19, 2020 and December 30, 2022 articles. Under the SECURE Act of 2019 (“SECURE 1.0”), 401(k) plan sponsors are required to allow employees who complete 500 hours in each of 3 consecutive years (“LTPTs”) to begin making elective deferrals starting in 2024. Effective for plan years beginning in 2025, SECURE 2.0 changed that requirement from three to two consecutive years of 500 hours. Neither of these rules apply to collectively bargained plans.
Eligibility Under the Act
To better understand the changes enacted under SECURE 2.0, it may be helpful to recall the original rule under SECURE 1.0. For periods of service beginning on or after January 1, 2021, 401(k) plan sponsors are required to allow LTPTs to make elective deferrals after they have:
- Completed three consecutive 12-month periods in which they have worked at least 500 hours, and
- Attained age 21 by the end of the three-year period.
Therefore, to comply with this rule, plan sponsors should have started tracking hours in 2021. For calendar year plans, the earliest entry date for LTPTs will be January 1, 2024.
Expanded Eligibility Under SECURE 2.0
SECURE 2.0 retains the age requirement for LTPTs but reduces the three-year requirement to two years. As noted above, plan sponsors should already be tracking service to comply with SECURE 1.0. However, to timely implement this new rule, plan sponsors need to commence tracking service starting in 2023. Therefore, starting January 1, 2025, employees must be allowed to make elective deferrals after completion of two consecutive 12-month periods in which they have worked at least 500 hours and attained age 21.
It is important to note that a plan sponsor must still comply with the SECURE 1.0’s three-year eligibility requirements. For example, an employee working at least 500 hours in 2021, 2022, and 2023 must be permitted to make elective deferrals commencing January 1, 2024.
In addition, SECURE 2.0 clarified that pre-2021 service is disregarded for both eligibility and vesting service purposes. It also expanded the eligibility rules to cover 403(b) plans.
Plan Sponsor Considerations
It is important to keep in mind the following considerations when implementing this new rule:
- Coordination with Recordkeeper. Plan sponsors are responsible for alerting the 401(k) recordkeeper when employees have worked at least 500 hours over three consecutive 12-month periods. In most cases, the recordkeeper will not have direct access to the employee service records needed to determine eligibility under the rules.
- Company Contributions. There is no requirement that plan sponsors allocate profit sharing or matching contributions to LTPTs’ accounts until they otherwise meet the service requirements under the 401(k) plan.
- Nondiscrimination Testing. LTPTs can be excluded from annual coverage and nondiscrimination tests.
- Exclusions. There is a long-standing rule that 401(k) plans cannot exclude a class of employees based on service. However, it is unclear under the LTPT eligibility rules whether a 401(k) plan can exclude a class of employees based on other distinctions, such as their location or job classification. We will be looking for regulatory guidance from the Internal Revenue Service (IRS) or Department of Labor (DOL) on this question.
What to Do Now?
Count, coordinate, and communicate. Be sure that employment records and payroll systems are accurately tracking service for part-time employees. Plan sponsors should coordinate and communicate with recordkeepers to ensure that LTPTs are timely notified of their eligibility to make elective deferrals.
Stay abreast of new regulatory guidance. We anticipate that the IRS and DOL will issue clarifying guidance on the eligibility rules and other changes under SECURE 2.0 over the next several months.
Review summary plan descriptions and other participant communications to ensure that the new rules are accurately reflected. SECURE 2.0 does not require plan amendments reflecting the new rules until the last day of the first plan year beginning on or after January 1, 2025 (2027 in the case of governmental plans).
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