It’s official! The IRS (finally!) released guidance on the new treatment of LTPT employees (long-term part-time) vis-a-vis your 401(k) plan. And not a moment too soon! Changes are effective 1-1-24. Here’s what you need to know to treat LTPT employees properly in the new year.
What’s your favorite thing to do the Monday after Thanksgiving?
- Hunt down a can’t-pass-it-up cyber deal?
- Craft the next of many leftover turkey sandwiches?
- Read new regulations proposed by the IRS…??
Right. Favorite or not, this year, the Treasury (home of the IRS) saw fit to celebrate T-day with its long-awaited guidance (since 2019!) amending rules applicable to 401(k) plans with respect to the new treatment of LTPT employees (long-term part-time). The proposed regulation affects participants, beneficiaries, employers, and administrators of 401(k) plans.
A little background: the way we were (before SECURE)
Retirement plans can’t exclude employees from eligibility based on part-time status alone. However, the IRS code did permit 401(k) plans to exclude employees from eligibility until they worked at least 1,000 hours in a year. This effectively excluded most part-timers. So plan sponsors simply left part-time employees out of eligibility based on hours worked. This prevented them from making deferred salary contributions.
Everything changed with the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and the subsequent SECURE 2.0 Act of 2022. These acts set forth new rules requiring the inclusion of “long-term part-time employees” (LTPT) in 401(k) plans if certain conditions are met.
Since then, we’ve been waiting (and waiting) for guidance on how exactly to put the new rules into practice, which go into effect January 1, 2024… waiting, that is, until November 27, when the IRS quietly released an update while we all still enjoyed the holiday’s afterglow.
New treatment of LTPT employees, defined
Beginning in 2024, 401(k) plans must permit part-time employees who work at least 500 hours per year over three consecutive years to contribute to a 401(k) plan, if they choose. SECURE 2.0 expanded LTPT eligibility even more. It stated that employees who work at least 500 hours a year over two consecutive years are eligible to contribute to a 401(k) plan starting in 2025.
If they drop below that 500-hour minimum in any year, that “resets the clock” on their eligibility. However, once qualified, LTPT’s can continue to contribute, even if their hours drop below 500 in a year.
Long story short, you have a new category of eligible employee, LTPT, that you must track and offer participation to in your retirement plans. Since 1-1-24 is the first eligibility date, you must look at part-time employees from 2021 forward to see if they qualify under the new rules.
That is a high-level summary of what you need to know as we enter the new year. Work with your TPA (Third-Party Administrator) to ensure you treat LTPT employees properly within your 401(k) plan, starting 1/1/2024.
Additional Resources
If you would like to read many more words on the topic, you can geek out with these additional resources:
Ferenczy Law’s article, The LTPT Regulations Are Here!
Seyfarth Shaw LLP’s article, The long wait for LTPT guidance is over.
Or get the deets straight from the Treasury Department and IRS announcement.
Consider us another resource: Don’t hesitate to turn to your friendly neighborhood 401(k) plan auditor to confirm compliance come audit time: Contact Cassell Plan Audits to get started today.
