Background
The SECURE 2.0 Act’s LTPT rule took effect on January 1, 2023, which means that as of January 1, 2025, any employee who has worked at least 500 hours (but no more than 999 hours) annually for two consecutive years (and has reached age 21 by the end of that two-year period) must be permitted to contribute elective deferrals to a 403(b) plan, unless otherwise excluded. 401(k) plans are already subject to similar rules under SECURE 1.0, but SECURE 2.0 updated the LTPT employee rules and expanded their coverage to employer-sponsored ERISA 403(b) plans.
The LTPT Rules Don’t Always Apply
LTPT employees are classified as LTPT participants if the only reason they are eligible to participate in the plan is because of the LTPT rules. Employees who gain plan eligibility for any other reason are not considered LTPT participants. For example, plans that permit all employees to contribute elective 403(b) deferrals immediately would never have any LTPT participants, since all employees would always be eligible well before the LTPT eligibility rules would apply.
Another instance in which the LTPT rules would never apply is in plans that use the elapsed time method. For example, plan entry after six or twelve months of service without regard to hours of service would not be subject to the LTPT rules. We discussed this in more detail in our blog How to Get Something for Nothing.
Two Points of No Return: Regular Participant Status and LTPT Vesting Schedules
The Internal Revenue Service has issued proposed LTPT regulations for plans other than 403(b) plans. This is what the rules may look like if the LTPT employee regulations for 403(b) plans are similar to those for other plans.
Once a participant has become eligible under the regular terms of the plan, the employee will not be able to obtain LTPT status at a later date, even if the employee’s work schedule changes and the person would have met the LTPT rules had the reduced hours taken place first. However, if the participant becomes an LTPT employee first, achieving the plan’s regular eligibility requirements later will turn him/her into a regular participant, but not for vesting purposes.
When a former LTPT employee becomes a regular participant, the LTPT rules cease to apply, the individual must be included in all non-discrimination and coverage testing and must also receive any applicable top-heavy minimum contribution. Unfair as it may seem, the LTPT employee turned regular participant will continue to earn a year of vesting service after working only 500 hours, not 1,000 hours, like similarly situated plan participants must work. Specifically, the former LTPT participant remains entitled to vesting for years in which they work 500 or more hours, and so in this limited way, the LTPT rules continue to apply.
Unless Otherwise Excluded?
Historically, 403(b) plans have been able to exclude employees who normally work less than 20 hours per week from plan participation. The LTPT rules effectively eliminate this exclusion after two years, once the participant meets the LTPT eligibility requirements. In fact, these permissively excluded employees will be subject to the LTPT rules on January 1, 2025. They will be eligible if they have worked 500 hours a year for two consecutive years, starting with the 2023 plan year. For example, previously excluded sports coaches and summer camp counselors who work for schools will likely become eligible on January 1, 2025.
Sports Teams Coaches and Summer Counsellors
Below, we have projected the number of hours per year coaches and counsellors might work to provide an example of the analysis that will apply to any employee previously excluded pursuant to the “less than 20-hours per week” permitted exclusion.
Sports Coaches
Coaches typically work an average of 2-3 hours per day during the three sport seasons: Fall, Winter and Spring, not including tournaments, if a team qualifies. Fall coaches may work a couple more weeks due to mid-August practices.
If the same coach works 3 hours a day for each 3-month coaching season:
13 weeks times 15 hours a week = 195 hours per season times 3 seasons = 585 hours per year
If the same coach works 2.5 hours a day for each 3-month coaching season:
13 weeks times 12.5 hours a week = 162.5 hours per season times 3 seasons = 487.5 hours per year
Summer Camp Staff
Summer Camp runs from mid-June through the 2nd week of August, or approximately 9 weeks. Most camp counsellors work 7 hours per day, but some work 40 hours if they staff the extended day program. Camp counselors rarely work the entire 9 weeks due to vacations and early departures to return to college. Camp coordinators usually work the full 9 weeks, but they do not exceed 40 hours a week, resulting in a maximum of 360 hours for summer employment.
So, employees who work fewer than 20 hours per week but more than 500 hours per year can be excluded from elective deferrals for the first two years of their employment but then must be permitted to make elective deferrals. Additional exclusions from 403(b) plans are beyond the scope of this article.
What’s the Bottom Line?
The bottom line is that LTPT eligibility may not affect the bottom line. The LTPT rules only require that the affected employees be given the opportunity to defer. Employer contributions are an option, but they are not required. In fact, if LTPT participants receive an employer contribution, the employer can elect to exclude LTPT participants from the discrimination and coverage tests. The election to include or exclude LTPT participants must apply to all non-discrimination and coverage testing purposes, such as the ACP test that applies to match and after-tax contributions, the IRC Section 410(b) coverage test, and whether the employer’s discretionary profit-sharing contribution satisfies discrimination testing under IRC Section 401(a)(4).
In the case of safe harbor plans, employers are not required to make a safe-harbor employer contribution to LTPT participants, and their exclusion will not cause the plan to fail safe-harbor requirements.
Getting to the bottom of the LTPT rules may cause administrative challenges, but if employer contributions are not offered to LTPT participants, LTPT participants are not likely to affect the bottom line, except for…
The Large Plan Audit Requirement
Subject to the 80-120 exception, plans with 100 account balances on the first day of the plan year are generally subject to an annual financial statement audit performed by an independent qualified public accountant (IQPA). LTPT balances may throw a plan over the audit threshold. To date, there is no indication that LTPT balances can be excluded from the participant count for audit requirement purposes. Absent creative plan design opportunities to avoid the audit, contrary to our blog Counting what Counts, Counts the Auditors Out!, LTPT participants may end up counting us in!
