Long-Term, Part-Time Employee Administration

Long-term, Part-time employees became eligible for the first time in 2024 for for-profit corporations and in 2025 for nonprofit corporations. 403(b) plan sponsors’ auditors will request backup for LTPT employee identification, eligibility, and their effective opportunity to defer during next year’s audits. This blog will explain the rules and the best practices for employers challenged by the proper administration of LTPT employee eligibility.

Background and Timeline

• December 2019 – The SECURE Act introduced the Long-Term Part Time employee rules.
• September 2020 – IRS Notice 2020-68, included LTPT vesting guidance that later became obsolete.
• January 1,2021- vesting service for LTPT determination started counting for
• January 1, 2024 -initial eligibility for LTPT employees of for-profit entities but on
• December 29, 2022, the SECURE 2.0 Act modified the LTPT rules before they became effective.
• November 27, 2023- Proposed Regulations issued for Long-Term, Part-Time Employee Rules for Cash or Deferred Arrangements Under Section 401(k)
• January 1, 2024- For profit corporation LTPT employees became eligible, except if they were part of an excluded group.
• January 1, 2025- 403(b) plan LTPT employees became eligible. If a participant works between 500 and 999 hours for two consecutive years, the exclusion of participants who work an average of 20 hours or less cannot apply once the participant meets the LTPT rules.

Identifying LTPT Participants: Two Consecutive Eligibility Periods

LTPT participants must be given the opportunity to contribute employee deferrals if they work between 500 and 999 hours for two years in a row, but two years may not mean 24 months if the plan’s eligibility periods switch from the first hire date anniversary to the plan year for subsequent years.

Two years of credit for thirteen months of work: Two eligibility years means thirteen months for a November 1 hire, if the adoption agreement says that the first eligibility period is the hire date anniversary and subsequent eligibility periods follow the plan year:

• First eligibility period: November 1, 2023 – November 1, 2024
• Second eligibility period: January 1, 2024-December 31, 2024
• Entry date: January 1, 2025

See our blog titled How to Get Something for Nothing. As you can see, an employee’s first LTPT year MUST begin with the date of hire and then the employer has a choice to switch to the plan year and if it does, then the second year will overlap the first year, giving the employee double credit for the same months of work.

Service prior to 2021 for SECURE and 2023 for SECURE 2.0 is disregarded for LTPT employee identification, so plan-year hours are used for employees hired before those dates when plans switch the computation period to the plan year.

In my opinion, switching to the plan year sets all the computation periods on the same clock and simplifies administration. Using the hire-date anniversary for eligibility and vesting computations causes additional tracking and additional work.

Hours Worked Not Available? Use the Equivalency Method

For employees who are paid by the day or by the task, employers may not have the number of hours worked. In those cases, the plan document can choose a permitted equivalency method to determine eligibility by crediting:

• 10 hours per day
• 45 hours per week
• 95 hours semi-monthly
• 190 hours per month

Other options, such as 8 hours per day or 40 hours per week are not available. Under each equivalency method, the employee is attributed the entire equivalency, even if only one hour was worked during that day, week, semi-monthly period, or month.

Avoiding the LTPT Rules

Favorable Eligibility Provisions: Any eligibility provision that allows plan entry before 500 hours of service avoids the LTPT rules:

• Immediate eligibility
• Two months of service – equivalency method
• Three months of service – equivalency method
• 500 hours of service in twelve months

Exclusions Other than Age or Service

Employees who work in an excluded division or excluded class of employees (other than because of age or service) are not subject to the LTPT group rules. The substance of the exclusion matters more than the form, such that the exclusion conditions cannot be hourly exclusions in disguise. The Regulations specifically say that employers cannot use exclusions that are a disguise for hours of service, such as excluding “seasonal” or “part-time” employees. To determine whether the excluded class of employees is a proxy for excluding LTPT employees, the IRS will likely analyze what percentage of the people being excluded would have met the LTPT rules and whether some LTPT employees are still being allowed to defer into the plan in spite of the exclusion. For example, if the plan excludes interns, and all the interns would have been LTPT employees, the IRS could determine that the exclusion is a proxy for excluding LTPT employees. Excluding classes of employees that happen to be part-time is a suspicious and risky choice.

Union employees and nonresident aliens can also be excluded but the hours of service while being a union employee or a nonresident alien count if the employee changes classification, just like they would for eligibility to the plan.

The Elapsed Time Method: Using the elapsed time method also avoids the LTPT rules for most employees, since the employee only needs to be employed at the beginning and the end of the eligibility computation period, without regard to hours actually worked, equivalencies, or even periods of absence during a twelve-month period. However, employees who do not meet the elapsed-time method requirements, because they leave and come back more than 12 months later, could still meet the LTPT requirements by working 500-999 hours two years in a row, separated by a 13-month period of absence that straddles the two years.

For example:

• 1/1/2023 – Date of Hire (DOH)
• 7/1/2023 – Date of Termination (DOT) after working 501 hours
• Break in Service
• 8/1/2024 – Date of Rehire (DORH)
• 12/31/2024 – 501 hours worked

The above employee would be an LTPT employee in a plan that uses the elapsed time method to determine eligibility.

Once-In-Always-In

Once an LTPT employee meets the initial LTPT eligibility requirements, the employee remains eligible even if hours-of-service drop below 500 in a subsequent year.

• 2023-500 Hours
• 2024-500 Hours
• Entry date 1/1/2025
• 2025-400 Hours
• 2026-400 Hours

The participant is still eligible to defer in 2025 and 2026.

• 2027-1000 Hours

The Former LTPT becomes a regular participant on 1/1/2028.

Rehires

LTPT Rehires are immediately eligible upon rehire, without having to wait for the next entry date, if they have not incurred five breaks in service.

Former Long-Term, Part-Time Employees

If an LTPT employee later meets the regular eligibility requirement, the employee will never be an LTPT employee again. LTPT employees who later become regular participants are considered Former LTPT participants and are still subject to the LTPT vesting rules:

• 401(k) plans – one year of vesting service for every year since 2021with 500 hours
• 403(b) plans – one year of vesting service for every year since 2023 with 500 hours

The following example demonstrates vesting service credits given to a 401(k)-plan participant who was hired on January 1, 2020:

Employer Contributions

LTPT employees do not have to be eligible to receive employer contributions, including safe harbor contributions and top-heavy contributions. The plan document must indicate that the LTPT employees are excluded from safe harbor contributions. Alternatively, LTPT employees can be eligible for a different employer contribution amount than regular employees.

Discrimination Testing

Even if LTPT employees receive an employer contribution, the plan can exclude LTPT employees, but not Former LTPT employees, from the:

• ADP test
• ACP test
• Top-heavy test
• Coverage test
• 401(a)(4) nondiscrimination test
• Minimum gateway contribution
• Average benefit percentage test

However, if LTPT employees are excluded from one test, they must be excluded from all tests. Additionally, all LTPT employees must be included or excluded from the testing.

Top-Heavy Contributions vs. Top-Heavy Testing

Like safe-harbor contributions, top-heavy contributions for LTPT employees are optional, but the plan document must say whether LTPT employees are excluded from top-heavy contributions.

Regardless of whether the plan excludes LTPT employees from the top-heavy test, the LTPT employee accounts MUST be included in the top-heavy test. Including the LTPT employees in the top-heavy test will generally make it easier to pass the top-heavy test, unless the LTPT employee’s account is aggregated with a key employee account for the top heavy test due to family attribution.

Audit Considerations

LTPT Employee balances are not excluded for the determination of the audit requirement. Please refer to our blog titled Counting What Counts, Counts the Auditors Out for the mechanics of the audit requirement.

Automatic enrollment increases the number of balances that are counted to determine if an audit is required. Since automatic enrollment is optional for LTPT employees of plans that are not subject to mandatory automatic enrollment, existing plans that are teetering around 120 balances should consider whether automatic enrollment will trigger an audit requirement. Plans that are subject to mandatory automatic enrollment should automatically enroll LTPT employees. Additionally, the optional inclusion of LTPT employees in the discrimination tests will also affect the decision to automatically enroll participants.

To test whether LTPT were properly given the opportunity to participate, the auditor will identify the population of LTPT employees by:

• Establishing whether the plan’s eligibility computation period changes to the plan year in the second year
• Isolating new employees to compute the hours worked on the first computation period on a sample basis.
• Printing hourly reports for two years for ongoing LTPT determinations
• Requesting election forms for a sample of the identified LTPT employees. Alternatively, eligibility notices, emails, signed policy manuals are acceptable evidence that an opportunity to defer was granted, but they are not a best practice.

Mistakes Happen: Correcting Improper Exclusion of LTPT Employees

If an employee is inadvertently excluded, correction procedures generally require that the employer deposit a percentage of the omitted deferrals plus 100% of the missed match, as applicable. The following chart summarizes the corrective contributions required if an LTPT employee is improperly excluded.

An Ounce of Prevention is Better than a Pound of Cure

Be prepared. Both small and large employers should perform the four steps that the auditors will take to ensure that they properly identify LTPT employees. In most cases, LTPT employees will decline to participate when given the choice, but the employer cannot assume what they would do. It’s important to keep records that LTPT employees were given the opportunity to defer when they became eligible. Document, document, document so that you can show off your best practices to your friendly financial statement auditor and if necessary, a government auditor or investigator. An ounce of prevention is better than a pound of cure.