Long term part time employees

[Belgarath]

I haven't seen any official guidance on the following situation, and I wondered if there was something that I missed?

Suppose a plan excludes "truck drivers" for all purposes. They are excluded even if they have satisfied the plan's 1 YOS/1,000 hour requirement. Plan passes coverage with flying colors.

Now skip ahead to 2024 (*or possibly 2023 if SECURE 2.0 further complicates things). Must the LTPT truck drivers be allowed to defer?

It seems like the grossest type of stupidity if they must be covered, while excluding people in the same employment classification who satisfy a 1 YOS/1,000 hour requirement.

If there hasn't been any official guidance I've missed, anyone have a pipeline with some IRS folks for "unofficial" conversations that they might have had?

[CuseFan]

https://www.asppa.org/news/look-new-long-term-part-time-employees-rules

https://www.napa-net.org/secure-act-long-term-part-time-employees-qas

Here are a couple of articles that appear to opine, especially the NAPA piece (see Q&A#3), that the 3 years of 500-999 hours is only a 401(k) deferral eligibility service provision and does not change any reasonable eligibility class exclusion that may be in the plan. So a truck driver exclusion could continue to apply to all truck drivers whether full-time or part-time.

This is obviously the interpretation that makes sense versus an interpretation that would require including PT truck drivers who would be excluded if working FT. The equally obvious disclaimer - do not assume subsequent regulations and/or guidance will clarify with the most logical interpretation, stranger things have come out of the IRS. But I cannot see this going the other way.

[Belgarath]

Thanks Cuse.

[Peter Gulia]

Under Internal Revenue Code of 1986 § 401(k)(2)(D), a condition for treatment as a qualified cash-or-deferred arrangement is that the arrangement must “not require, as a condition of participation in the arrangement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the close of the earlier of—

(i) — the period permitted under section 410(a)(1) (determined without regard to subparagraph (B)(i) thereof), or

(ii) — subject to the provisions of paragraph (15), the first period of 3 consecutive 12-month periods during each of which the employee has at least 500 hours of service.”

If a condition other than an age or service condition is permitted for someone whose service condition is met with one year of service, the same condition ought to be permitted for someone whose service condition is met with the three 500-hour years.

And questions about whether a job classification or other condition for participation is an indirect service condition ought to be resolved without regard to which of the two kinds of service conditions an employee might meet.

Belgarath, isn’t an absence of guidance better? That way, intelligent practitioners like you and CuseFan can just read the statute, without needing to consider an error the IRS might introduce.

[C. B. Zeller]

31 minutes ago, Peter Gulia said:

If a condition other than an age or service condition is permitted for someone whose service condition is met with one year of service, the same condition ought to be permitted for someone whose service condition is met with the three 500-hour years.

The use of conditions other than age and service are still limited by the coverage test of §410(b). In effect the coverage test provides "guard rails" against the (ab)use of class exclusions.

However, §401(k)(15)(B)(i)(II) provides that the employer may elect not to apply §410(b) to long-term part-time employees. Without the coverage test, I would want some other guidelines by which to determine that a particular exclusion is not abusive. Otherwise, an employer could come up with a classification that would allow them to exclude all, or nearly all, of their long-term part-time employees, which seems contrary to the intent of the law.

[C. B. Zeller]

By the way, a request for guidance on the LTPT rules was the very first item (actually the first two items) on ARA's recent letter to the IRS:

https://araadvocacy.org/wp-content/uploads/2022/07/22.06.03-ARA-Comment-Letter-2022-2023-Priority-Guidance-Plan.pdf

[Peter Gulia]

C.B. Zeller, thank you for the follow-up. I'm seeing now how differences in which service condition is involved could affect the question of whether a job classification is really a disguised or indirect service condition.

[FormsRstillmylife]

I am cautioning consultants about "Intern" as a classification -- anything that would look suspect if it looks like a person should move out of the category.

[Peter Gulia]

I’m curious about what BenefitsLink mavens this about this:

Is it simpler to make employees eligible for elective deferrals (but not to share in any allocation of nonelective or matching contributions) with no service condition?

What are the advantages and disadvantages of such a design?

If an employee is eligible for elective deferrals with no service condition (and not because of § 401(k)(2)(D)(ii)), does that excuse the plan from providing the unusual vesting described in § 401(k)(15)(B)(iii)?

[C. B. Zeller]

A major disincentive to allowing all employees to participate immediately is that if the plan is top heavy (or becomes top heavy in the future) then those employees would be entitled to a top heavy minimum contribution, even if they would not otherwise be eligible for employer contributions under the plan.

401(k)(15)(B)(ii) provides that employees who are eligible solely because of 401(k)(2)(D)(ii) may be excluded from the top heavy minimum. It remains to be seen how the IRS will interpret the word "solely" in this context. It could mean that an employer who restricts their employees' eligibility to the minimum allowed under the LTPT rules may come out better in terms of their required top heavy minimum contribution than an employer who allows their employees to participate immediately.

[Peter Gulia]

C.B. Zeller, thank you for this pointer about top-heavy.

(I'm glad top-heavy is a non-issue for plans I advise about.)