New Guidance On Rules For Long-Term, Part-Time Employees In 401(K) Plans

Who is an LTPT employee?

An LTPT employee is an employee who is eligible to make elective deferral contributions to an employer’s 401(k) plan, or qualified cash or deferred arrangement, solely because the employee:

• Completed two consecutive 12-month periods where the employee is credited with at least 500 hours of service
• Reached age 21 by the end of the second plan year

LTPT employees do not include:

• Employees who are eligible to participate in a 401(k) plan due to satisfying other eligibility requirements and not solely as a result of the LTPT requirements. For example, if the 401(k) plan has immediate eligibility for all employees or a “30 days of employment” eligibility requirement, employees who become eligible for the 401(k) plan under such terms would not be considered LTPT employees.
• Collectively bargained employees
• Certain nonresident aliens
• Employees who do not meet plan eligibility for reasons other than age or any service requirements. For example, a plan may require that an employee have a specified job classification or work at a specific location to be eligible to participate in the plan.

How does the proposed rule apply to plans that use the elapsed time method to credit service?

Under the elapsed time method of crediting service, a plan determines eligibility by the period of time that passes while an employee is employed, without regard to the actual number of hours that an employee works. Plans using this method may not require an employee to complete more than one year of service for eligibility. Therefore, an employee in a plan that uses the elapsed time method could not be classified as an LTPT employee because each employee would satisfy the plan’s eligibility requirements by the end of their first 12-month period, regardless of the number of actual hours worked during such period.

This means that under the proposed rule, an employer using an elapsed time method is not required to begin tracking hours of service to identify LTPT employees.

How does the proposed rule apply to plans that use equivalency methods to credit service?

Under an equivalency method of crediting service, a plan applies an alternative method to crediting hours of service that is not based upon the actual number of hours an employee works. Because an employee is still credited with a specified number of hours under an equivalency method, the proposed rule permits employers to continue using a permissible equivalency method to determine whether an employee is credited with at least 500 hours of service during a 12-month period.

Therefore, under the proposed rule, an employer could continue using an existing equivalency method to identify LTPT employees, and an employer would not be required to separately track each hour that an employee actually worked.

What special rules apply to LTPTs for eligibility and plan participation?

Calculating hours of service for LTPT employees:

• The initial 12-month period begins the first day the employee is credited with an hour of service
• Subsequent 12-month periods are calculated by applying the first day of the plan year. If the new plan year begins within the initial 12-month period, then the two periods are treated as consecutive 12-month periods.

Determining when an eligible LTPT employee can being participating in the plan: Once an LTPT employee meets eligibility requirements, the employee must to able to join an employer’s 401(k) plan no later than any other eligible employee in the plan. Therefore, an LTPT employee must enter the plan no later than:

• The first day of the first plan year after the employee meets the eligibility requirements or
• Six months after the LTPT employee meets the eligibility requirements

Reduction in an LTPT employee’s hours:

• If an LTPT employee works fewer than 500 hours during a later 12-month period, the LTPT employee’s eligibility to participate in the 401(k) plan will not be affected

What are the vesting rules for LTPT employees?

While employee deferrals are always vested fully, it is important to understand the vesting rules applicable to any employer contributions made on behalf of former LTPT employees who have become eligible for employer contributions that are subject to a vesting schedule.

Vesting rules for LTPT employees:

• An LTPT employee must be credited with a year of service for proposes of vesting for each 12-month period where the employee was credited with at least 500 hours of service
• 12-month periods from before Jan. 1, 2021, are excluded for LTPT employee vesting purposes
• Vesting periods for LTPTs will be required if an employee later meets the plan’s standard eligibility requirements or the plan offers employer contributions with a vesting schedule to LTPT employees

Vesting rules for former LTPT employees:

• If an employee becomes eligible to participate in a plan solely because the employee met the LTPT requirements, but is later credited with 1,000 hours of service, or completes the plan’s regular eligibility standards, the employee would then become classified as a former LTPT employee. In this situation, a former LTPT employee would still be credited with a year of vesting services for any 12-month period where the employee was credited with at least 500 hours of service. Therefore, a former LTPT employee would not subsequently be required to meet 1,000 hours of service for vesting purposes.