Long-Term PArt-Time Employees

[austin3515]

The more I read these rules the more convinced I am that the only possible option is to avoid these rules altogether by designing eligiblity rules to avoid exlcuding LTPT Employees. So for example the most simplified approach here will be to change the 1,000 hours in 12 months eligiblity to 500 hours (at least for 401(k)).  There are other options, but I am concluding that what is not an option is for a client to try and administer these LTPT rules in the context of a plan with 1,000 hours and 12 months "normal" eligibility.

Can I get an Amen?

[John Feldt ERPA CPC QPA]

How about Profit Sharing only, no deferrals? If that’s not enough, add a DB or cash balance plan? To reduce notices, perhaps hire a professional to invest and don’t offer participant direction of investments?

[C. B. Zeller]

16 hours ago, austin3515 said:

Can I get an Amen?

Nope, at least not if you want to have a safe harbor match and you might be top heavy.

For top heavy purposes, you are allowed to disregard employees who are eligible "solely" because of LTPT rules. If you start letting in employees other than those you absolutely have to, then you can no longer ignore them for top heavy.

SECURE 2 says you don't have to give the top heavy minimum to otherwise excludable employees, but the mere fact that they are participants means you lose your top heavy exemption for being a safe harbor plan. So your employees who have completed a year of service will now have to get a top heavy minimum. Or, you will have to include the otherwise excludable employees in your safe harbor match. But either way, the employer is going to be on the hook for more contributions.

[austin3515]

I think that maybe I was not clear enough.  Plan A has eligibility of 1,000 hours in 12 months.  The LTPT Rules will be incredibly burdensome to track, particularly since they changed the rules from 3 to 2 years and included complex transition rules.  Even if they can track all of that the vesting rules are an additional burden.  What I am proposing to clients who want to keep things simple is to just change their eligibility from 1,000 hours in 12 months to 500 hours in 12 months.  This avoids all of the insanity in the eligiblity rules created by these new standards.  I understand that there are other alternatives, and I understand the top-heavy rules.  My quesiton really has to do with the fact that even the most sophisticated clients are going to struggle figuring out who worked 1,000 hours in 12 months, and if not 500 hours in 12 months and 500 hours in a subsequent plan year or 1,000 hours in a plan year after that.  It's just too much review to be the least bit practical.

So I am talking to clients about changing eligibility to avoid all of that insanity (such as amending eligiblity to be 500 hours in 12 months--which by the way for most employers is barely a change at all since "most" employees are full-time (of course I understand that is not always the case).

[Paul I]

At the ASPPA Spring National last week, the session on LTPT included a point that

"SECURE 2.0 provides that Safe Harbor Top Heavy exemption is not lost because otherwise excludible employees do not get it, so no
Top Heavy contributions needed"

The presenter seemed to have more positive than negative comments for plan designs with 401(k) eligibility of 6 months with 500 hours (effectively eliminating LTPTs), and continuing to apply 12 months with 1000 hours for match and employer contributions.  The participants in 6 to 12 months range would be otherwise excludible.

 

[austin3515]

1 hour ago, Paul I said:

The presenter seemed to have more positive than negative comments for plan designs with 401(k) eligibility of 6 months with 500 hours (effectively eliminating LTPTs), and continuing to apply 12 months with 1000 hours for match and employer contributions.  The participants in 6 to 12 months range would be otherwise excludible.

That doesnt work because if someone does not work 500 hours in 6 months, the fall back is required to be 1,000 hours in 12 months. And then guess what? IF  they don;t meet that now you have to review for 500 hours in 2 years.  So this eligibility is the most bazaar of all becasuse it requires 36 different reviews of eligibility for one person (yes I'm exaggerating a lot but it's a nutty design).

I should clarify that I work with a lot of small sponsors.  I think the term "small" for these purposes goes up to a couple hundred employees.  A straight 1,000 hours in 12 months is a challenge for that market.  Adding this level of complexity for those smaller employers is something that I see as critical because I KNOW it was too complex for them to want to deal with it (even if they could handle it).

I still haven;t gotten that Amen I was looking for...

[Peter Gulia]

I think austin3515 is onto something. My observation is perhaps not a fulsome Amen, but:

If one presumes or assumes an employer won’t submit hours-of-service data with enough detail, frequency, promptness, and formatting to enable a third-party administrator’s or recordkeeper’s software to apply the plan’s § 401(k)(15) provisions (and the employer is unwilling or unable internally to apply those provisions), might such an employer make an informed choice to let go some relief from top-heavy provisions?

Are there circumstances in which the incremental portion of a top-heavy contribution might be less expensive than the employer’s cost to apply a plan’s § 401(k)(15) provisions?

(There are other choices I’m deliberately not remarking on or describing.)

[austin3515]

Well and of course not all plans are top-heavy, there is that aspect as well.  And not all plans have that many people who WOULD be eligble under LTPT rules but NOT eligible under 1,000 hours/12 months.  It is those plans in particular that I am advising changes to 500/12 months.  

[Peter Gulia]

I’m with you.

And my clients that have § 401(k) arrangements had many years ago switched to immediate eligibility with no service condition.

(I recognize my clients have different circumstances than those many BenefitsLink neighbors remark on.)

[austin3515]

1 minute ago, Peter Gulia said:

And my clients that have § 401(k) arrangements had many years ago switched to immediate eligibility with no service condition.

Now that we have some top-heavy relief and some audit relief that is going to be a much more popular option. Thanks!

[Belgarath]

Our clients are so wildly diverse in their employee populations/employment patterns, human resources/payroll competencies, HCE "greed factor" etc., that I haven't been able to formulate a "general standard" - although to be truthful, I haven't expended excessive thought on it. These conversations are helpful in that regard, so thank you for your observations!

[John Feldt ERPA CPC QPA]

19 hours ago, Paul I said:

"SECURE 2.0 provides that Safe Harbor Top Heavy exemption is not lost because otherwise excludible employees do not get it, so no
Top Heavy contributions needed"

Okay, so the LTPT employees don’t get the top-heavy, I get that. What about the rest of the normal employees? Where does the law or regs say this “plan” still consists of only SH an deferrals? I haven’t done that research yet. 

[Roycal]

Austin3515.  A couple of observations that will be of no direct help.  First, the assumption that any employer, large or small, tracks hours by the rules written the plan document (which we will assume satisfy the ERISA/IRC requirements) is always a mistake, always has been.  But there is nothing you can do about that from the standpoint of making sure they do comply.

Second, whether you are talking about a 1,000 hr. rule for eligibility to become a participant in the first place, or to receive a contribution (along with some other rules, usually, in either case), or abandon the hours approach entirely, this is where your skill as an advisor/consultant or whatever comes into play.  The right way to do it is to get a good understanding, as good as you can, from the employer regarding his objectives for the plan, and then put your knowledge of his options to use.  In my experience, the employer response is often  something like, "Well, I don't know, I just want to have a 401(k) plan."  That puts you on the spot, does it not, and puts your business model to the test.

Even going with an elapsed time rule for eligibility to become a participant isn't going to be foolproof.  The employer's recordkeeping is still dependent on human inputs and humans paying attention, and on spending money to get it right, and there is no cure for failures in those aspects of the problem.  Good luck.

[austin3515]

5 hours ago, John Feldt ERPA CPC QPA said:

Okay, so the LTPT employees don’t get the top-heavy, I get that. What about the rest of the normal employees? Where does the law or regs say this “plan” still consists of only SH an deferrals? I haven’t done that research yet. 

It doesnt say that which is very disappointing thing.  So top-heavy sh match plans really get no benefit.  I think that is widely acceptd by the "pension elite" (Watson, Ferenczy, etc).  At least I recall they said as much in their articles and webinars.

[David Schultz]

I do not believe that correct.  While I won't claim to be of the "pension elite", I think I am on solid ground here: 

SECURE 2.0 §125 modifies IRC §416(g)(4)(H) (which provides that a plan that consists solely of contributions under 401(k)(12) (safe harbor match or NEC) shall not be top heavy). 

The SECURE 2.0 change adds the following language to this subsection:

    "Such term shall not include a plan solely because such plan does not provide nonelective or matching contributions to employees described in section 401(k)(15)(B)(i)."  

§401(k)(15)(B)(i) makes reference to employees who are solely eligible to participate because they are LTPTs.  

Separate from the above, 401(k)(15)(B)(ii) provides that an employer may exclude all EEs who are solely eligible to participate because they are LTPTs from the vesting and top-heavy minimum contribution requirements.

Put these together and (1) there is no top-heavy contribution requirement for LTPT EEs and (2) the exclusion of LTPT EEs from receiving a safe harbor contribution does not eliminate the top-heavy exemption for plans that would otherwise be exempt.  

There may be a myriad of reasons to expand "traditional" eligibility to include the employees who would otherwise be LTPTs; however, doing it to prevent a safe-harbor (match or NEC) plan from losing the top-heavy exemption due to LTPTs not receiving a safe harbor contribution is (thankfully) not one.

[austin3515]

I was referring to a plan with 3 months elapsed time (for example) and 12 months / 1,000 hours for SH Match. For a plan like that, the LTPT relief you’re talking about is not available. Therefore if a safe harbor match plan with this eligibility does not extend the safe harbor to all eligibles it does not qualify for the top heavy exemption and needs to provide the THM to anyone with a year of service and age 21 - a deal breaker for a SH match plan.  So I think although Congress probably intended to allow a SH Match plan to switch to 3 months eligilbity for 401k and a year of service for SH Match and still maintain the exemption (because the new rule has a fraction of the value one might expect), a careful reading with all applicable cross-checks does not get there.

I remain hopeful that they will fix this.  If their goal is to encourage liberal 401(k) eligiblity this is a huge impediment to that design.  Most of my SH Match plans would mke a change like this .  Most of them want to do this already but will not because of the top-heavy rules.

[Paul I]

This discussion brings back memories of when the computation periods, hours and service regulations in CFR 2530.200b-1,2 & 3 were first released soon after ERISA was enacted.  There was a lot of complaining that the rules are impossible to administer, that companies would not adopt plans or would terminate plans rather than deal with the rules, that the expense of administration would be prohibitive, and more.

Somehow we have lived with those rules for almost 50 years now and retirement plans are thriving.  Yes, LTPT rules are challenging and recent legislation is not perfect.  Let's inform plan sponsors of the rules, provide unbiased alternatives, listen to their feedback, respect their decisions, help guide them through implementation and monitor compliance.

Regardless of how sane or insane these rules may seem, retirement plans will continue to thrive.

[Belgarath]

I'm just not sure I will thrive along with them...this foolishness is turning me into a grumpy old man. ☠️

[LANDO]

I'll give an AMEN to that!

[austin3515]

1 hour ago, Paul I said:

This discussion brings back memories of when the computation periods, hours and service regulations in CFR 2530.200b-1,2 & 3 were first released soon after ERISA was enacted.  There was a lot of complaining that the rules are impossible to administer, that companies would not adopt plans or would terminate plans rather than deal with the rules, that the expense of administration would be prohibitive, and more.

Somehow we have lived with those rules for almost 50 years now and retirement plans are thriving.  Yes, LTPT rules are challenging and recent legislation is not perfect.  Let's inform plan sponsors of the rules, provide unbiased alternatives, listen to their feedback, respect their decisions, help guide them through implementation and monitor compliance.

Regardless of how sane or insane these rules may seem, retirement plans will continue to thrive.

Listen that review alone is still complicated.  Hours in first 12 months, and hours in subsequent plan years is a complex requirement of plan administration,. That's my point.  IT is an exponential increase in complexity to add these additional levels of review.  Obviously if clients want to do it, I'm not firing them as a client or anything.  But I am being proactive about having these discussions and making sure they know just how complicated it is.  I'm a little surprised at the lack of agreement on the simple fact that this is more than most sponsors can handle.

[Peter Gulia]

Everything about counting service—for any of many retirement plan purposes—is complex (and always was, at least since 1974).

In my experience, all but the most fully computerized employers lack complete capabilities for service counting applied “in real time.”

Those weaknesses might not matter if a plan provides immediate entry and immediate vesting.

Or even if a plan’s administrator might count years of vesting service to determine the nonforfeitable portion of subaccounts for matching and other nonelective contributions, one might not need to count the service until after the participant is severed from employment (or has reached 59½ or another retirement age).

austin3515 rightly observes that if a plan counts service to determine an employee’s eligibility, counting service to apply, distinctly, the § 401(k)(15) conditions is a further and different complexity.

And austin3515 is right to have the information included in a plan-design conversation.

[Paul I]

I agree that alternative plan designs should always be part of the conversation because often the acceptable solution to administrative complexity is a change in design.

I disagree that this is more that most clients can handle.  Most clients that work with plans that have dual eligibility between full-time and part-time, and use age 21 and 1 year of service with 1000 hours, plus periodic entry dates have the skill set needed to implement LTPT rules.  They speak the language.  They understand initial eligibility computation periods.  They understand vesting service.  They track classifications of employees.  They also have access to relatively recent historical data.

If a client does not have a plan with these characteristics, they still are capturing data at the level needed to implement by the fact that the most common pay practice for part-time employees is pay for hours worked.

Yes, it is change.  Yes, it is not simple.  No, the sky is not falling.

 

 

[austin3515]

18 minutes ago, Paul I said:

I disagree that this is more that most clients can handle.

Just out of curiousity, are you a TPA dealing with payroll people who are responsible for this stuff?  Even the CFO's and Chief HR People who have ultimate responsbiliity?  What's the average size plan you are working with?  We may just be in two different markets.  I say 95% of those companies less than 250 employees will NOT want to deal with this nonsense.  Could they? I mean I suppose any of them could do it.  Do they want to allocate all of those extra resources to keep 10 or 15 people out of the Plan (which is often the difference between 1,000 hours in 12 months and 500 hours in 12 months even for 150 to 200 employees).  

And I guess I have the data to back it up.  I've gone over this with maybe a 15 to 20 clients so far and all but 1 says "nope, please keep it simple for me."  Just so we are clear:

Current: 

1) Did they work 1,000 hours in first 12 months - if yes you're done, they are eligible.. 

2) If not, Did they work 1,000 hours in a plan year?  If yes, you're done they are eligible. 

3) Repeat step 2 until they are eligible (if ever)

Revised:

1) Did they work 1,000 hours in first 12 months - if yes you're done, they are eligible.. 

2) If not, Did they work 1,000 hours in a plan year?  If yes, you're done they are eligible.

3) If 1) is no, did they work 500 hours in their first 12 months?  That is 1 year.  Make a note somewhere safe and hold onto it because you'll need it later.

4) Regardless of whether or not 3 is yes or no, did they work 500 hours in a plan year?  If so, make a note because you'll need it later.

5) If you have 2 yeses between 3 and 4 for two seperate years, they need to be offered eliigibility for 401k.  Their vesting must be updated based on 500 hours (not the 1,000 hours you likely apply to all of their co-workers) so make sure your vesting is tracked accordingly (including if you ever change recordkeepers or TPA's).

6) Even though 5 is done you are not done yet.  You still need to perform step 2 every calendar year.

You do what you want to do but I am strongly advising clients to avoid this $#%$# show.

 

 

 

[RatherBeGolfing]

24 minutes ago, austin3515 said:

You do what you want to do but I am strongly advising clients to avoid this $#%$# show.

Here is your Amen! @austin3515.  And I agree, the vast majority of clients struggle with dual eligibility or less than straightforward entry dates, and will absolutely turn this into a huge mess.

[Paul I]

I am a TPA and provide recordkeeping, compliance and reporting services to 125 clients ranging from about 200 participants down to solo plans.  I also curently provide plan administration and consulting services to a dozen clients that range in size from 5,000 to over 400,000 participants.  I personally have built recordkeeping systems from the ground up, have consulted on recordkeeping system design for several of the major recordkeeping providers, and have consulted with payroll departments on data structures, coding specifications, and data schemes.  I programmed the recordkeeping system for and ran the system for the 3rd 401(k) plan that came into existence in 1982 for a Fortune 100 company with approximately 10,000 participants.  I regularly work with C-suite members.

Your outline of revised steps is good.  Note that the logic is very similar to what needs to be tracked now for dealing with rehires.

In discussions with clients, we talk about the rules and the data requirements, the implications for adding to participant counts, data maintenance and retention, system interfaces, relative effort and costs - and alternative plan designs.  We stick to the facts.  We inform.  The client makes the decision. 

[austin3515]

I hope my comment before was not read as to question your credibility?  I've re-read it a couple of times and I don't see that.  IF anything,  as I suspected, you are way up market from me.  And that really was my point, what a plan sponsor with 50,000 employees is capable of is drastically different than a client with 50 or 75 employees, which is where the bulk of my business lies.  I know you have clients less than 200 people and maybe they have more of an appetite for this stuff than my clients do.

Since you have experience programming recordkeeping systems, I'm curious to know how easy you think it's going to be for recordkeepers who track eligibility to reprogram their systems for this.  I think it's going to be a real challenge.  And in particular I think there is going to be a lot of missing data that they will need to backfill for clients who transferred to their platforms in the last couple of years, and I have not heard boo from any of them on this topic.  It's going to be a real shock to the system because I know a lot of them are tracking eligibility for their clients.  I'm definitely concerned about the volume of data they have to be missing.

[Paul I]

My comments more than anything else go more towards staying focused on informing clients and then helping them run their plans the way they want to run their plans.  My comments also focus on the fact the methods and skills needed to administer LTPT employees are not new to the industry.

Recordkeepers who have data stores structured to hold and make accessible historical data see the LTPT data as analogous to maintaining historical data for plan participants to be available in the event there rehires. 

Recordkeepers who summarize and purge historical data (commonly as part of an annual "roll forward" process) will not have a place to put historical data.  They will have to create indicators within participant records to track LTPT data.  For example, keeping a counter of the number of years of LTPT eligibility service.  These recordkeepers will have a greater challenge to collect historical data from a client, map it into the recordkeeping system, and then integrate the logic to use the mapped data to determine eligibility.  In this case, the recordkeepers will rely primarily on the client and payroll to provide the historical data.

Note the plans that have a relatively small number of part-timers can accommodate the LTPT eligibility tracking on their own relatively easily by with simple tools.  This can be done as simply as keeping a spreadsheet with each year's compliance data on a tab.  If a part-time employee is on track to work 500 hours, a simple search across the entire workbook for the employee will likely reveal whether the part-time employee has prior service.

The biggest factor contributing to the success or failure of implementing the LTPT rules is the willingness of service providers (recordkeeper and payroll) and the client to work cooperatively.  At the end of the day, the service provider that takes a hard line that everything must be done the way they want it done and they take a hard line creates unnecessary work for the client or other service providers, then that service provider will lose the business.

Clients do not have to wait for the recordkeeper to announce what they are going to need to support LTPT employees.  Clients can anticipate the data requirements for LTPT employees (pretty much the same as for other employees), and can take an inventory of what is available from the clients' files or from payroll files.

Payroll systems similarly are in the same boat as recordkeepers.  If a client's routine payroll reports do not include the data needed, then the client should take steps now to expand or modify the routine reports.

I am an optimist.  Open communication, teamwork and cooperation has seen our industry undergo several transformations - emergence of 401(k)s, voice systems, daily valuations, the internet - and there are even more in our future.  We have met every challenge, and we will meet this one.