LTPT Eligibility for Off-Calendar Year Plans

[LANDO]

For off-calendar year plans that use anniversary year for the first eligibility computation period (ECP) and plan year thereafter, when is the first date an employee could become eligible as a LTPT employee?  Example:

·         9/30 plan year end, ECP switches to PY after the first ECP, semi-annual entry for LTPT EEs

·         Participant hired 7/1/2021.

·         ECP 1 = 7/1/2021 – 6/30/2022

·         ECP 2 = 10/1/2021 – 9/30/2022

·         ECP 3 = 10/1/2022 – 9/30/2023

·         Assuming Participant had at least 500 HOS in each ECP above, should this participant have entered on 10/1/2023?

Do off-calendar year plans need to use anniversary year for 2021 - 2023 to avoid this result?  Just thinking about SECURE 1 interim amendments, which many have already done!

SECURE says: (b) EFFECTIVE DATE.—The amendments made by this section [112] shall apply to plan years beginning after December 31, 2020, except that, for purposes of section 401(k)(2)(D)(ii) of the Internal Revenue Code of 1986 (as added by such amendments), 12-month periods beginning before January 1, 2021, shall not be taken into account.

Presumably, that means 12-month periods (ECPs) after 12/31/2020 DO count for LTPT purposes.  

[RatherBeGolfing]

An example that was presented at ASPPA Annual used 1/31 PYE, 2/1 & 8/1 entry dates, and switch to plan year after the first period.  

Employee was hired January, 2021 and worked more than 500 but less than 1000 in the first computation period and the 2021 & 2022 Plan Years.  Participant enters 2/1/2023.

 

[Bill Presson]

I spoke with Ms Kelsey about that because I don't agree with her interpretation. the rule says three "consecutive years" for 500 hours. It doesn't say overlapping years. 

[Paul I]

Section 112 of SECURE 1.0 says for LTPTs:

(D) SPECIAL RULES.—
(i) TIME OF PARTICIPATION.—The rules of section 410(a)(4) shall apply to an employee eligible to participate in an arrangement solely by reason of paragraph (2)(D)(ii).
(ii) 12-MONTH PERIODS.—12-month periods shall be determined in the same manner as under the last sentence of section 410(a)(3)(A).

The last sentence of section 410(a)(3)(A) says:

For purposes of this paragraph, computation of any 12-month period shall be made with reference to the date on which the employee's employment commenced, except that, under regulations prescribed by the Secretary of Labor, such computation may be made by reference to the first day of a plan year in the case of an employee who does not complete 1,000 hours of service during the 12-month period beginning on the date his employment commenced.

This is the language that gives rise to the ability to shift the eligibility computation period to the plan year starting within the participant's first 12 months of employment.  If the plan provides for the a shift in the eligibility computation period for LTPTs, then an LTPT very likely will have the eligibility service to enter the plan before the LTPT employee's 3rd anniversary of employment.

I have not seen anything that requires the plan to apply the same eligibility service computation period to all employees.  If there is no such requirement, then the plan sponsor may consider using the anniversary date ECP for LTPTs and the shifting rules for non-LTPTs. 

Given the lack of guidance, the recommendation is for a plan sponsor who chooses to take this route of having differing rules minimally to adopt a formal eligibility service policy for LTPTs in anticipation of a future plan amendment.

This is all dependent on the availability of data and systems to be able to do the eligibility determinations correctly.

[RatherBeGolfing]

1 hour ago, Bill Presson said:

I spoke with Ms Kelsey about that because I don't agree with her interpretation. the rule says three "consecutive years" for 500 hours. It doesn't say overlapping years. 

I thought the same, but Kelsey corrected me, it is "12 month periods" not "plan years" or "consecutive years".

Arguably, the "overlapping" periods are still consecutive because there is no period with less than 500 hours in the sequence.

[Bill Presson]

42 minutes ago, RatherBeGolfing said:

I thought the same, but Kelsey corrected me, it is "12 month periods" not "plan years" or "consecutive years".

Arguably, the "overlapping" periods are still consecutive because there is no period with less than 500 hours in the sequence.

Well, I'm going to argue until I'm forced into submission.

[LANDO]

FWIW...our document vendor's opinion was that the participant in my example above would have/should have entered the plan on 10/1/2023.

Our default election for LTPT eligibility in our SECURE/CARES interim amendments is/was, switching ECPS. That is consistent with how we set up plans for normal eligibility and allows us to better assist sponsors with eligibility tracking.

Absent some formal guidance saying no LTPT employees enter before 1/1/2024, we are going to have our off-calendar year clients execute SECURE/CARES interim amendments calling for ECPs based on anniversary years for LTPT purposes for at least the period 2021 - 2023.  Given the extended deadline for SECURE/CARES interim amendments, this should be a reasonable solution to address potential 2023 entry dates for LTPT participants in off-calendar year plans.