LTPT Proposed Regs issued by IRS

[Lois Baker]

Proposed regs released Friday morning 11/24 -- happy Thanksgiving, all!

 

[Peter Gulia]

BenefitsLink neighbors, please help me consider how to administer, and later amend, a plan to follow § 401(k)(2)(D)/401(k)(15). (Let’s assume the proposed rule becomes the final rule.)

Before 2024 (and before 2019), the plan makes an employee eligible (unless a specified exclusion applies) if she is age 21. There is no service condition. An employee enters with the first pay period that begins with or after the date she met the eligibility conditions. So, a new employee enters the plan on her first day of employment.

The eligibility conditions are the same for each of elective contributions, matching contributions, and nonelective contributions.

If it matters, the plan uses no nondiscrimination safe harbor. The plan is one of a few dozen different plans that are counted together in one § 414(b)-(c)-(m)-(n)-(o) group. The plan is not, and has no risk of becoming, top-heavy.

Before 2024, the plan excludes an employee the employer classifies as an intern (even if that employee is not an intern for some purpose other than the retirement plan).

The employer classifies as an intern anyone who lacks a baccalaureate degree. An intern works in a summer, between semesters.

The proposed rule sets up some consequences for an eligibility condition that “has the effect of imposing an age or service requirement with the employer or employers maintaining the plan.” No general statement in the proposed rule explains or describes how one would discern that a condition “has the effect of imposing an age or service requirement[.]”

Beginning with 2024, the plan’s administrator intends to administer the plan according to what the administrator anticipates the later amended and restated plan will retroactively provide.

If an intern is invited for a third consecutive summer, she will have completed two consecutive 12-month periods during each of which she was credited with 500 hours of service. [29 C.F.R. § 2530.200b-3(c)-(e) https://www.ecfr.gov/current/title-29/part-2530/section-2530.200b-3#p-2530.200b-3(c)] If such an intern has reached age 21 (and no exclusion applies), meeting § 401(k)(2)(D) would make the intern eligible for elective contributions.

May the plan’s administrator exclude an intern under the plan’s intern exclusion? This would mean finding the intern exclusion is not a proxy for an age or service condition.

Or should the plan’s administrator reason that the intern exclusion “has the effect of imposing an age or service requirement” and treat a three-peat intern as eligible for elective contributions?

If the plan sponsor now amends the plan to make every intern—even those who don’t meet § 401(k)(2)(D) conditions—eligible for elective contributions (but not for matching contributions, nor for nonelective contributions), would any unwelcome consequence result? (Assume neither the plan sponsor nor the employer worries about how this change would affect an average-deferral-percentage test.)