- Addressing employer concerns. A public hearing next month will highlight more comments and concerns about recent proposed compliance guidance over long-term, part-time employees under the SECURE 2.0 Act.
- More part-timers. According to the latest Bureau of Labor Statistics data, 22.2 million Americans choose to work part time. That’s 14% of all workers, the largest share since February 2020.
- Preparing for change. Employers should assess how these changes fit with their business goals and workforce characteristics, especially since potential increases in plan costs may not always justify the administrative convenience.
Federal regulators will soon field more comments and concerns from employer and industry groups at a public hearing set for March 15 — centering on recent proposed guidance about new requirements for long-term, part-time (LTPT) employees under the SECURE 2.0 Act.
Late last year, the IRS issued long-awaited guidance that clarified some questions about how employers should implement retirement plan eligibility rules. But it has also sparked concern about others.
In answer to frequent questions about whether employers can continue to exclude certain categories of employees even if they might meet LTPT definitions, for example, the answer is yes — as long as the designated class isn’t an excuse to exclude based on age or service.
Say an organization’s 401(k) historically excluded warehouse workers from participating, but now some of them meet the LTPT requirements. Under the proposal, the employer doesn’t need to change its participation policy in the future.
But when faced with questions about vesting, the IRS guidance noted that if employees start off part-time and later become full-time, they’ll be granted vesting credits for their part-time work in years in which they worked at least 500 hours.
Employer pushback was swift and came from both the public and private sectors. In comments to the IRS proposed rules:
- The American Retirement Association (ARA) wrote, “individuals participating solely as LTPTs and any employee who ever entered the plan as a LTPT (former LTPTs) are required to be credited with a year of vesting service for each 12-month period in which they are credited with at least 500 hours of service. This is not consistent with the statute or Congressional intent and creates a material negative impact on plan sponsors.”
- The National Association of Government Defined Contribution Administrators requested a full exemption from the rule in its letter, noting that “governmental plans encounter complexities in local law enabling requirements, payroll systems, and administration that most private sector employers do not face …”
- The ERISA Industry Committee in its comment letter requested a good-faith compliance standard for the proposal.
- And the U.S. Chamber of Commerce also asked for a good faith standard for no less than 12 months.
The part-timer rules have drawn stepped-up interest as the part-time workforce continues to expand. At the end of January, 22.2 million U.S. workers, or 14% of all workers, chose to work part time — the largest share since February 2020, according to Bureau of Labor Statistics data. More part timers means more employees could be enrolled in retirement plans than ever before, creating a greater employer obligation under SECURE 2.0.
Expansion and Exemptions
SECURE Act 2.0 expanded the LTPT employee rules of the original 2019 SECURE Act to cover employer-sponsored 403(b) plans and reduced the three-year period to a two-year period, so that now any employees who have worked at least 500 hours (but no more than 999 hours) annually for two consecutive years (and have reached age 21 by the end of that two-year period) must be permitted to contribute to a retirement plan.
But there are certain employee exemptions within the context of 401(k) plan eligibility, said Holly Tardif, director of retirement at WTW.
Employees who are part of a collectively bargained plan may not be subject to the expanded plan eligibility rules that apply to long-term, part-time workers after two years of service.
“Employees can also be excluded if they fall within an excluded category that is not based on service such as employment location or job,” Tardif said. “Also, these new rules do not apply to plans which credit service based on elapsed time.”
A plan may exclude other job classifications as well, said Michele Kolcak, area senior vice president, retirement plans, at Gallagher. “But if the classification is defined by how much or little they work — like part-time, temporary or seasonal — they would need to consider the LTPT rules.”
Effect on Employer Contributions
While the new proposal affecting SECURE 2.0 doesn’t mandate any employer contributions to part-time workers’ plans, it could uncover other unintended consequences, experts say.
Adapting to it could lead some employers to eliminate waiting periods for both employee elective deferrals and possibly employer contributions as well, said Tardif.
The aim, she said, would be to simplify administrative procedures, although this could result in increased plan costs due to more employees qualifying for contributions sooner.
“For companies with few part-time workers,” Tardif said, “the extra expense might be considered an acceptable compromise to ease the complexity of plan management.”
Employers that offer a 401(k) plan that provides for some kind of employer contributions — like matching, discretionary or profit-sharing — should also pay attention to this expansion of plan access, said John D. Arendshorst, a partner at Varnum Law.
“[Those employers] will definitely want to check their plan’s language so that when these long-time part-time employees get into the plan,” he said, “they’re not also eligible for those contributions unless that’s what the employer wants to do.”
Next Steps
To ensure proper compliance with SECURE 2.0, experts suggest discussing this guidance with plan providers and a fiduciary advisor or consultant.
“Revisit your current plan design,” said Kolcack, “and evaluate if any additional administrative burden tracking employee hours aligns with retirement plan objectives and opportunities to help improve your employees’ financial wellbeing.”
They should also establish routines with HRIS and payroll vendors to verify eligibility data and swiftly correct discrepancies, said Tardif. Additionally, reevaluating plan designs to reduce administrative burdens — such as eliminating waiting periods or altering eligibility criteria — can be beneficial.
However, said Tardif, it's important for employers to assess how these changes fit with their business goals and workforce characteristics, “considering that the potential increase in plan costs may not always justify the administrative convenience.”
And while SECURE 2.0 contains some provisions that are helpful to employers, said Arendshorst, the LTPT provision places an additional hour-counting burden on employers, who should keep close watch for the expected final regulation to be issued in the near future.
“They really need to keep on top of this regulation,” he said, “because it would be really easy for an employer to accidentally violate these new provisions without really knowing about it.”
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