Retirement Updates

On April 16, 2024, the DOL issued a request for public comment on its proposal to create a database to allow individuals to locate former retirement plan information. This searchable database would help implement the requirement under the SECURE 2.0 Act to more easily allow individuals to obtain plan administrator contact information.

Prior DOL initiatives under the existing Terminated Vested Participants Project (TVPP) for defined benefit pension plans indicate retirement plan administrators often lose track of participants and beneficiaries. Similarly, participants and beneficiaries often lose track of their own past accounts. In some cases, recordkeeping challenges, business closures, or mergers and acquisitions activity may result in accounts becoming “lost.” The proposed Retirement Savings Lost and Found database aims to facilitate the reunification of participants and beneficiaries and their prior accounts.

The DOL’s request asks for voluntary participation from plan administrators and indicates administrators can attach the information to their 2023 Form 5500 filing. Interested parties may submit comments through June 17, 2024.

DOL Federal Register 2024-07968 »

The IRS recently issued Notice 2024-35, which updates and extends the transition relief provided in Notice 2023-54, which addressed changes made by the SECURE Act and the SECURE 2.0 Act in required minimum distribution (RMD) requirements for qualified plans such as 401(k) plans, IRAs, Roth IRAs, 403(b) plans, and 457(d) eligible deferred compensation plans. (For further information on prior Notice 2023-54, please see our August 1, 2023, Compliance Corner article.)

The SECURE Act originally increased the age for determining an individual’s required beginning distribution date from 70 1/2 to age 72. The SECURE 2.0 Act then increased that to age 73 beginning January 1, 2023. Periodically, the IRS has issued transition relief to help plan administrators and others implement these changes to the RMDs. For example, Notice 2023-54 updated previous relief relating to otherwise required RMDs to beneficiaries after the deaths of participants (otherwise known as “specified RMDs”) in 2020 and 2021 to include the same for otherwise required RMDs related to participant deaths in 2022.

Notice 2024-35 essentially extends this relief for another year, meaning that plans will not be treated as failing to satisfy the RMD rules for the failure to make a specified RMD in 2024 related to a participant’s death in 2023, nor will a taxpayer be subject to an excise tax for having failed to take a specified RMD.

Employers should be aware of this extension of the previous transition relief and consult with their advisors for further information.

Notice 2024-35, Certain Required Minimum Distributions for 2024 »

On April 2, 2024, the DOL announced that it amended a rule that provides an exemption for qualified professional asset managers (QPAMs). A QPAM is defined as a bank, savings and loan association, insurance company, or registered investment adviser that assists retirement plans in making financial investments. QPAMS are particularly useful in that they can facilitate transactions that would otherwise not be allowed under ERISA, through the exemption granted by the DOL. The amendment clarifies language in the original rule, including what misconduct can render a QPAM ineligible for the exemption. The amendment:

• Requires a QPAM to provide a one-time notice to the DOL that it is relying upon the exemption.
• Updates the list of crimes enumerated in the original rule to explicitly include foreign crimes that are substantially equivalent to the listed crimes.
• Expands the circumstances that may lead to ineligibility.
• Provides a one-year winding down (transition) period to help plans and IRAs avoid or minimize possible negative impacts of terminating or switching QPAMs or adjusting asset management arrangements when a QPAM becomes ineligible pursuant to the original and gives QPAMs a reasonable period to seek an individual exemption, if appropriate.
• Updates asset management and equity thresholds in the QPAM definition.
• Clarifies the requisite independence and control a QPAM must have with respect to investment decisions and transactions.
• Adds a standard recordkeeping requirement.

Sponsors of ERISA retirement plans should be aware of these new clarifications and procedures for evaluating whether a QPAM is eligible for the exemption.

Amendment to Prohibited Transaction Class Exemption 84-14 for Transactions Determined by Independent Qualified Professional Asset Managers (the QPAM Exemption) »
DOL Amendment to QPAM Exemption Announcement »

On February 28, 2024, Chairperson Bernard Sanders (I-VT) and the majority staff of the Senate Health, Education, Labor, and Pensions (HELP) Committee released its report “A Secure Retirement for All” in coordination with that day’s full committee hearing on the potential for the expansion of defined benefit pension plans.

The report takes a dim view of the state of retirement in America, highlighting a 2019 report by the US Government Accountability Office showing nearly half of Americans 55 and older did not have any retirement savings, as well as a 2021 academic research study that found nearly half of all Americans – regardless of age – are at risk of financially insecure retirements.

The steep decline in defined benefit pension plan participation is the primary theme of the report, which shows that while almost 30% of American workers had a defined benefit plan in 1975, only 13.5% do now. Although the contrast between defined benefit plan participation and defined contribution plan participation over the past 50 years is well-known, the numbers are still striking: More than 27.2 million workers participated in defined benefit plans in 1975 versus just 11.2 million workers participating in defined contribution plans. But, in 2019, over 85.5 million workers participated in defined contribution plans versus just over 12.6 million workers who participated in defined benefit plans.

For the committee’s consideration, the report concludes with two possible means of addressing the decline in defined benefit plans:

First, the report recommends expanding Social Security through various means such as removing the earnings cap ($168,600 a year in 2024) on the Social Security portion of the federal payroll, increasing benefit amounts across the board, and using the Consumer Price Index for the Elderly to determine annual cost-of-living-adjustments to benefit payments.

Second, the report recommends establishing a federally facilitated pension program modeled on similar programs in states such as California, Illinois, Oregon, Connecticut, Maryland, and Colorado, which would require businesses that have operated for two years or more to offer a defined benefit pension plan or defined contribution retirement plan meeting minimum requirements to its workforce, or, alternatively, offer its employees access to a state or the federally facilitated plan.

Speaking on behalf of the committee’s minority membership at the hearing, ranking member Sen. Bill Cassidy (R-LA) broadly opposed these recommendations, observing that the relative popularity of defined contribution plans compared to defined benefit plans was not necessarily a negative outcome overall, and that more time should be given for the provisions of SECURE Act 2.0 to take effect before implementing major changes such as those proposed by the majority staff in the report.

While the HELP report provides useful information regarding the present role of defined benefit plan participation in the retirement space, its policy recommendations do not have the force of law, nor are they likely to be taken up for consideration by the full Senate this year. They do, however, provide valuable insight as to the current retirement policy priorities of HELP’s Democratic majority membership, which are often leading indicators of future retirement policy initiatives.

Report: A Secure Retirement for All »

On February 13, 2024, the Employee Benefits Security Administration (EBSA), the DOL agency responsible for enforcement of ERISA, reported monetary recoveries totaling over $1.434 billion in its report on enforcement activities for fiscal year (FY) 2023. EBSA oversees approximately 2.8 million health plans, 619,000 other welfare benefit plans, and 765,000 private pension plans. These ERISA-covered plans cover 153 million workers, retirees, and dependents who participate in private-sector pension and welfare plans that hold an estimated $12.8 trillion in assets.

Total recoveries for terminated vested participants (e.g., individuals no longer working for an employer but entitled to benefits) accounted for more than half of the $844.7 million in benefits recovered and obtained through enforcement actions, with $429.2 million in benefits recovered for 5,690 terminated vested participants in defined benefit pension plans.

Informal resolutions of individual complaints resulted in another $444.1 million in recoveries, and the Voluntary Fiduciary Correction Program (VFCP) and Abandoned Plan Program recovered $84.5 million and $61.2 million, respectively. The VFCP allows plan officials who have identified certain ERISA violations to remedy the breaches and voluntarily report the violations to EBSA without becoming the subject of an enforcement action. EBSA received 1,192 VFCP applications for FY 2023.

The Delinquent Filer Voluntary Compliance Program (DFVCP) encourages plan administrators to bring their plans into compliance with ERISA's filing requirements by providing significant incentives for fiduciaries and others to self-correct. 18, 955 Form 5500s were filed through the DFVCP for FY 2023.

EBSA also reported that it closed 731 civil investigations in FY 2023, with 505 of those closed “with results” (such as nonmonetary corrections or injunctive relief) and 50 referred for litigation. EBSA’s criminal investigations resulted in 60 indictments and 77 guilty pleas or convictions.

Other reported actions include nonmonetary corrective actions and interventions regarding the denial of coverage for a life-saving heart transplant and access to COBRA coverage for mental health benefits. Additionally, the opening paragraph of the report puts “increased access to mental health benefits” on par with eliminating illegal plan provisions and improving fiduciary governance in terms of how the agency’s enforcement activities have “made a difference for current and future participants,” indicating an intention to make access to mental health coverage an ongoing priority.

Sponsors of ERISA retirement and/or health and welfare plans should be aware of these enforcement activities and take note that almost a third of the total reported recovery amounts for FY 2023 are the results of complaints submitted to EBSA by individuals (usually plan participants) rather than investigative activities initiated by the agency.

Fact Sheet »
DOL News Release »

On January 24, 2024, the DOL finalized rules to amend the individual application procedure for prohibited transaction exemptions under ERISA and the Code. The final rules (termed the “Final Amendments”) follow the proposed rules published on March 15, 2022, but reflect certain changes in response to public comments received. Please see our prior article for further information regarding the proposed rules.

ERISA sets forth standards and rules that govern the conduct of ERISA plan fiduciaries and safeguard the integrity of employee benefit plans. ERISA and the Code generally prohibit a plan fiduciary from causing a plan to engage in a variety of transactions with certain related parties (including sponsoring employers, affiliates, and service providers) unless a statutory or administrative exemption applies. The DOL and IRS have the authority to grant class or individual administrative exemptions from the prohibited transaction rules if the relief sought is administratively feasible, in the interest of the plan and its participants and beneficiaries, and protective of the rights of participants and beneficiaries.

The DOL is responsible for maintaining procedures for granting individual administrative exemptions, including the application process. According to the DOL, the March 2022 proposed rules were designed to, among other items, clarify the necessary reports and documentation for a complete exemption application, the information made available as part of the public record, the related timing aspects, and the options for submitting information electronically.

In the Final Amendments, the DOL addresses public comments received regarding the proposed rules. For example, many commenters expressed that the application process was longer than necessary and overly prescriptive. The DOL acknowledged the process can be lengthy but asserted that the Final Amendments make the exemption application process more efficient by reducing or eliminating delays caused when information is missing or incomplete.

Like the proposed rules, the Final Amendments largely retain language providing the DOL with sole discretionary authority to issue administrative exemptions (based on ERISA’s criteria). Commenters expressed concern that such discretionary authority could result in arbitrary decisions and that the DOL should be bound by previously issued exemptions to foster predictability and consistent treatment of applicants. The DOL did not agree to be bound by prior exemptions but modified the Final Amendments to indicate that previously issued exemptions may inform their determination of whether to allow future exemptions based on the unique facts and circumstances of each application.

Under the Final Amendments, conferences with the DOL prior to submission of an exemption application, and any related documents, will be part of the public record if a formal exemption application is submitted. Additionally, the prior conferences would need to be identified in the formal application. However, unlike the proposed rules, the Final Amendments allow potential applicants to seek a pre-submission conference anonymously without a public record created unless a formal application follows.

The Final Amendments also include provisions that affect those retained as independent fiduciaries or appraisers to represent the plan or establish the fair market value of an asset in a transaction, respectively. For example, the Final Amendments change the definition of an independent fiduciary or appraiser with modifications from the proposed rules. Additionally, the exemption application requires significantly more information regarding independent fiduciaries, appraisers, accountants, and auditors. An independent fiduciary’s liability insurance must be included, although specific levels of coverage are not required, as had been proposed. The Final Amendments also affect the contract terms between plans and independent fiduciaries and appraisers, among other parties (e.g., by prohibiting indemnification for contract breaches or violations of laws).

The Final Amendments reflect numerous other significant changes to the prohibited transaction exemption application process. Employers who sponsor ERISA plans and are considering filing an application for an individual administrative exemption should carefully review the Final Amendments and consult with legal counsel for further guidance. The Final Amendments are effective on April 8, 2024.

Final Amendments

On January 17, 2024, the DOL released guidance regarding pension-linked emergency savings accounts (PLESAs) as part of the implementation of the SECURE 2.0 Act. The guidance, which is in the form of 20 frequently asked questions (FAQs), provides general compliance information. The FAQs were developed in consultation with the IRS and follow a recent IRS notice concerning PLESA anti-abuse rules. (Please see our January 17, 2024, Compliance Corner article.)

As explained by the first five FAQs, PLESAs are individual accounts in defined contribution plans (such as 401(k) and 403(b) plans) that allow eligible non-highly compensated employees to save for financial emergencies via Roth contributions. Participants can make withdrawals from the PLESAs at least monthly at their discretion and without being assessed the penalty tax normally applicable to early retirement plan distributions. The FAQs explain that the plan cannot set eligibility criteria beyond that required for participation in the retirement plan nor set minimum balance or contribution amounts (subject to reasonable administrative restrictions, such as requiring contributions in whole dollars or percentages). Automatic enrollment in PLESAs is permissible, provided employees are provided advance notice and the opportunity to opt out and withdraw their funds without charge. 

FAQs six through 10 address contributions, which must be Roth contributions. The portion of a PLESA balance attributable to participant contributions may not exceed the $2,500 maximum (as periodically indexed for inflation). The guidance clarifies that a plan has flexibility to either include or exclude earnings when applying the limit. However, a plan cannot set an annual limit on participant contributions. If a plan provides matching contributions, an employee's PLESA contributions must be matched at the same rate as for non-PLESA elective deferrals. Plans must maintain separate recordkeeping for each PLESA.

FAQs 11 through 13 discuss distributions and withdrawals. FAQ 11 clarifies that a participant does not need to demonstrate or certify the existence of an emergency or other need or event to make a PLESA withdrawal. FAQ 12 explains that PLESAs cannot be subject to any fees for the first four withdrawals in a plan year. However, PLESAs may be subject to reasonable fees or charges in connection with any subsequent withdrawals.

Finally, FAQs 14 to 20 address investment and administration. PLESA contributions must be held as cash in an interest-bearing deposit account or in an investment product designed to preserve principal while providing liquidity. Accordingly, a plan’s qualified default investment alternative would normally not qualify. Reasonable administrative fees (separate from fees assessed solely for withdrawals) may be imposed directly on PLESAs or against the retirement plan account of which a PLESA is a part.

The plan administrator must provide notice at least 30 days prior to the first contribution and annually thereafter, explaining the PLESA contribution limit, tax treatment, and election procedures, among numerous other items. The notice can be furnished with other required ERISA disclosures. The guidance clarifies that the PLESA account balance does not need to be included in individual periodic pension benefit statements under ERISA Section 105 or investment disclosures under 29 CFR § 2550.404a-5. The last FAQ explains that the DOL is updating the 2024 Form 5500 to reflect the PLESA feature.

Plan sponsors who are considering offering PLESAs may find this guidance helpful and should review the FAQs for further details. They may also want to consult with their retirement plan service providers regarding the practical and administrative aspects of PLESA implementation.

FAQs: Pension-Linked Emergency Savings Accounts | U.S. Department of Labor (dol.gov) »

On January 18, 2024, the DOL released proposed regulations on automatic portability transactions for retirement plans when employees change jobs. This proposed change could make it easier for employees to keep track of existing retirement plan accounts with a benefit valued at $7,000 or less upon job termination. Currently, the rules allow those account balances to automatically roll over into a Safe Harbor IRA if the employee does not take certain actions upon job termination. The proposed rule would allow the employee to transfer the money from the Safe Harbor IRA into the requirement plan sponsored by their new employer and avoid fees or taxes associated with plan cash-outs or transfers.

The proposed rule would allow an automatic portability provider to receive a fee in connection with the transfer if certain conditions are met. The hope is that this would then lead to employees being able to more seamlessly rollover retirement accounts instead of needing to cash out accounts. The proposed regulations outline specific requirements that must be satisfied by the automatic portability provider including, but not limited to, required disclosures, permitted investments, record retention requirements, and annual audit and correction procedures.

While this proposed change is generally viewed as positive, retirement plan fiduciaries should be aware of this proposed ruling and the impact it may have on the plan. Those wishing to submit comments to the DOL must do so by March 18, 2024.

News Release »

On January 12, 2024, the IRS released Notice 2024-22, which provides preliminary guidance to assist plan sponsors with implementing Pension-Linked Emergency Savings Accounts (PLESAs). Specifically, the notice addresses anti-abuse measures to discourage potential manipulation of the PLESA matching contribution rules.

Created by Section 127 of the SECURE 2.0 Act, PLESAs are individual accounts in defined contribution plans (such as 401(k) and 403(b) plans) that are designed to allow eligible non-highly compensated employees to save for financial emergencies. PLESAs are treated as designated Roth accounts.

Generally, the maximum permitted balance in a participant's PLESA (attributable to contributions) is $2,500 (as indexed annually), unless the plan sponsor sets a lower limit. Subject to certain restrictions, the plan must match PLESA contributions at the same rate as other elective contributions to the defined contribution plan. PLESAs also must permit participants to withdraw their balance in whole or in part, at their discretion, at least monthly. Such withdrawals are not subject to the additional tax otherwise applicable to early plan withdrawals.

The SECURE 2.0 Act allows plan sponsors to adopt reasonable procedures to prevent manipulation of the PLESA matching contribution rule and directs the IRS to issue related guidance. The notice, which reflects the IRS’s initial effort to provide such guidance, highlights statutory provisions that a plan may consider in establishing anti-abuse procedures and provides examples of measures that are prohibited.

First, the notice reminds plan sponsors that matching contributions under the plan are treated first as attributable to a participant’s elective deferrals other than PLESA contributions. As a result, any elective deferrals a participant makes to the underlying defined contribution plan will be matched first and will lower the availability of matching contributions that will be made on account of participant PLESA contributions. Additionally, matching contributions due to PLESA contributions cannot exceed the maximum account balance limit for the plan year. As noted above, a plan sponsor can set a lower PLESA balance limit than $2,500, which would result in a correspondingly lower cap on annual matching contributions that could be subject to abuse. The sponsor could also limit the number of withdrawals to a maximum of one per month. The guidance clarifies that a plan sponsor could decide these statutory limitations were adequate and not impose other anti-abuse restrictions, even if a participant made and withdrew their PLESA contributions annually after receiving the corresponding match.

Second, the notice explains that reasonable additional restrictions imposed by the plan sponsor must be “solely to the extent necessary to prevent manipulation of the plan rules to cause matching contributions to exceed the intended amounts or frequency.” According to the guidance, requiring the forfeiture of matching contributions attributable to the PLESA, suspending participant PLESA contributions, or suspending matching contributions to the underlying defined contribution plan are not reasonable restrictions.

Plan sponsors considering offering PLESAs but concerned about the accounts being used only to gain matching contributions and not for the intended purposes should review this initial guidance. The IRS is also seeking comments regarding other reasonable anti-abuse procedures (and examples thereof) that effectively balance the policy of incentivizing emergency savings while discouraging potentially abusive practices. Sponsors interested in submitting comments must do so in writing on or before April 5, 2024, in accordance with the instructions in the notice.

Notice 2024-22 »

On December 20, 2023, the IRS released Notice 2024-2, which provides guidance in the form of questions and answers regarding certain mandatory and discretionary SECURE 2.0 Act provisions. The notice is not intended to provide comprehensive guidance but to address specific implementation issues. 

Notice 2024-2 focuses on twelve SECURE 2.0 Act provisions that either are effective or will be soon. As explained further below, the notice provides clarity with respect to several important SECURE 2.0 provisions (referenced by section number), including mandatory automatic enrollment, de minimis incentives, terminal illness withdrawals, self-correction of eligibility failures, and employer Roth contributions. 

Under Section 101 of the SECURE 2.0 Act, effective January 1, 2025, cash or deferral arrangements (CODAs), such as Section 401(k) plans, established after the law’s December 29, 2022 enactment date must have automatic enrollment and escalation features satisfying certain conditions. The notice clarifies that a plan is generally considered “established” for this purpose when the initial plan document is adopted, even if the plan’s effective date is later. Additionally, several questions address how mergers and acquisitions can affect whether a plan is subject to Section 101. Generally, if a plan subject to Section 101 is merged with a plan established prior to December 29, 2022 (i.e., a “grandfathered” plan), mandatory automatic enrollment applies to the ongoing plan. However, an exception applies for mergers occurring within the 410(b)(6)(C) transition period, which normally extends from the transaction date to the end of the following plan year. 

Section 113 allows plan sponsors to provide “de minimis” financial incentives (not paid from plan assets) to employees to encourage participation in CODAs without violating the otherwise applicable contingent benefit rule. The notice indicates that the value of such incentives cannot exceed $250 and could be in the form of cash or gift cards (but not a matching contribution), which would be considered taxable income. Furthermore, the incentives can only be offered to those not already participating but could be structured as installments, so a portion of the incentive is paid upon the initial deferral election and an additional amount conditioned upon continued plan participation for a period. 

Under Section 326, an eligible terminally ill individual is permitted to take an in-service distribution without being subject to a 10% early withdrawal penalty. The notice clarifies that on or before the distribution date, a terminally ill individual must be certified by a physician as having an illness or physical condition that can reasonably be expected to result in death 84 months or less after the date of the certification. The individual must be otherwise eligible for a plan in-service withdrawal (e.g., a hardship or disability distribution). Plan sponsors are not required to offer this option but should update their plan documents and procedures if they elect to do so. 

Section 350 allows plans to correct administrative failures to implement automatic enrollment and escalation features or offer an eligible employee an affirmative election opportunity. The notice indicates the corrections will generally follow the previous safe harbor methods and can be applied to both active and terminated participants. The notice also addresses the required timing for corrective contributions. 

Under Section 604, plans can allow employees to elect to receive employer contributions, such as matching and non-elective contributions, as designated Roth contributions. The notice confirms the election only applies to fully vested employer contributions. The questions and answers include detailed guidance regarding the applicable tax, reporting, and rollover treatment of such contributions. 

Notice 2024-2 also addresses aspects of numerous other SECURE 2.0 provisions related to cash balance plans, small employer start-up costs and military spouse credits, and SIMPLE IRAs, among other items. Accordingly, plan sponsors should be aware of this notice and consult with their advisors for further information regarding provisions applicable to their retirement benefits. 

The IRS intends to issue future guidance and invites public comments on the matters discussed in Notice 2024-2. Comments must be submitted on or before February 20, 2024. 

IRS.gov, Notice 2024-2 (PDF)

On November 27, 2023, the IRS issued Long-Term, Part-Time Employee Rules for Cash or Deferred Arrangements Under Section 401(k). As a reminder, the Setting Every Community Up for Retirement Enhancement (SECURE) Act required employers to deem part-time employees eligible for the 401(k) plan once they had completed three consecutive 12-month periods with 500 hours of service or more. The SECURE 2.0 Act followed that up by reducing the number of consecutive periods to two consecutive 12-month periods.

While the SECURE Act provision for long-term, part-time eligibility took effect on January 1, 2021, service that was completed before that date was not taken into account. As such, the first long-term, part-time employees that may become eligible under this provision will become effective as of January 1, 2024 (if they have completed three consecutive years with 500 hours of service each).

Given the impending effective date of the long-term, part-time (LTPT) employee provision, the IRS released the proposed rule to provide clarity on a number of subjects. The proposed rules define “long-term, part-time employee,” confirm participation and vesting requirements, speak to employer nonelective and matching contributions, and discuss employer elections.

“Long-Term, Part-Time Employee” Defined
LTPT employees are eligible to participate in 401(k) plans once they’ve completed 500 hours of service in each of three consecutive 12-month periods (or two consecutive 12-month periods beginning in 2025). The proposed rule clarifies that LTPT employees must still satisfy the age requirement (age 21) by the close of the last 12-month period with 500 hours. Additionally, the requirement to extend eligibility to LTPT employees does not apply to employees who are covered by a collective bargaining agreement or are nonresident aliens with no US-source income. Governmental plans and church plans are not exempt from the requirement, but the IRS is requesting comments on the application of these rules to those entities.

The IRS also clarified that employees who become eligible through some other framework of eligibility are not considered LTPT employees. Specifically, where an employer provides immediate entry into the 401(k) plan or implements another permissible service requirement, employees who become eligible are not LTPT employees even if they work 500 hours in the requisite number of years. Likewise, an employee who becomes eligible under a plan with an elapsed time method of crediting service (such that employees are eligible after a certain time period, regardless of hours worked) would not be considered an LTPT employee.

Participation
The IRS also provided guidance on the entry date for LTPT employees. Specifically, as for any other employee that becomes eligible for a 401(k) plan, LTPT employees’ participation in the plan must occur no later than the earlier of the first day of the plan year following satisfaction of the eligibility requirements or the date that is six months after the date the LTPT employee satisfied the eligibility requirements.

The IRS goes on to confirm that 12-month periods with 500 hours must be consecutive. So, if an ineligible employee has a year with less than 500 hours of service after a year where they completed 500 hours, the three consecutive year count starts over. On the other hand, LTPT employees who become eligible under these rules are locked in and will not lose eligibility to participate if they have a subsequent year with less than 500 hours of service.

The IRS also explained that while an employee’s initial 12-month period would begin on date of hire, subsequent 12-month periods could be counted based on the first day of the plan year.

Vesting
Although employers aren’t required to provide employer contributions to LTPT employees who become eligible for the plan, they will have to follow vesting rules if they choose to provide them. For these purposes, each 12-month period during which the LTPT employee is credited with at least 500 hours of service will be treated as a year of vesting. However, no service before January 1, 2021, will be counted towards LTPT employees’ service for vesting purposes.

The IRS also introduced the concept of former LTPT employees, who are LTPT employees who subsequently complete one year of service with 1000 hours (i.e., “normal” eligibility). These formal LTPT employees would cease to be considered LTPT employees such that they would be included in nondiscrimination and top-heavy testing. For vesting purposes, former LTPT employees will still be credited with a year of service even if they only work 500 hours in subsequent years.

Nonelective and Matching Contributions
Employers may choose not to provide nonelective or matching contributions to LTPT employees (with the exception of “former LTPT employees”). While the proposed rules would allow employers to elect to exclude LTPT employees for purposes of nondiscrimination testing, minimum coverage, and top-heavy testing, the IRS will not allow an employer sponsoring a SIMPLE 401(k) to exclude LTPT employees from matching or nonelective contributions.

Employer Elections
If employers choose to exclude LTPT employees from nondiscrimination testing, then they will be excluded from every nondiscrimination and coverage testing provision. Employers that have adopted a safe harbor plan must amend their documents to elect to exclude LTPT employees from the safe harbor (and related nondiscrimination testing). They must do the same to exclude LTPT employees from top-heavy testing. Employers may elect to exclude LTPT employees from nondiscrimination and top-heavy testing even if they decide to provide an employer contribution to them.

The proposed rules also confirmed that LTPT employees are eligible to make catch-up and Roth contributions. However, if an employer elects to exclude LTPT employees from nondiscrimination and coverage testing, they may choose to exclude LTPT employees from making catch-up and Roth contributions.

The proposed rules are set to apply to plan years beginning on or after January 1, 2024. The IRS is soliciting comments through January 26, 2024. They have also scheduled a public hearing on the proposed rule for March 15, 2024.

Employers should work with their retirement advisors, recordkeepers, and payroll or tracking vendors to ensure compliance with LTPT eligibility requirements.

Long-Term, Part-Time Employee Rules for Cash or Deferred Arrangements Under Section 401(k) »