LTPT - interns

[Belgarath]

Starting to work my way through this. Welcome news that certain class exclusions can apply. But, they cannot be a proxy for for an age or service requirement.

Consider the following: plan currently excludes interns. ALL interns work between 500 and 999 hours. My reading is that this exclusion would not be valid, and LTPT rights would need to be granted to interns that otherwise satisfy the LTPT age/service requirements. Agree/disagree?

Now, if interns work various numbers of hours - some 500-999, some over 1,000, and interns are an excluded class, then it should be permissible to exclude them from LTPT requirements. Agree/disagree?

Thanks.

[RatherBeGolfing]

Hmmm.  In your situation, all interns would be LTPT, but would all LTPTs for the plan be interns?  Intern  isn't service based exclusion, so I wouldn't jump straight to not valid.  Would there be other employees that enter as LTPT that are not interns?  Its makes for a more reasonable argument if you are not excluding all LTPTs, just the interns

[Peter Gulia]

And here’s a thread on which I posed some similar questions:

https://benefitslink.com/boards/topic/71371-ltpt-proposed-regs-issued-by-irs/#comment-334692

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 ADP test or an ACP test.)

[MoJo]

Define "intern."  I defy you to do so without having a service based condition.  I've tried, and my team has constantly caught me in the trap that makes interns a proxy for a service based exclusion.

[RatherBeGolfing]

40 minutes ago, MoJo said:

Define "intern."  I defy you to do so without having a service based condition.  I've tried, and my team has constantly caught me in the trap that makes interns a proxy for a service based exclusion.

Student or trainee gaining practical experience in their field of study?

 

[RatherBeGolfing]

46 minutes ago, MoJo said:

I've tried, and my team has constantly caught me in the trap that makes interns a proxy for a service based exclusion.

I think many intern definitions do fall into that trap, but I don't think it is service based per se, at least not in the sense that it would always be an impermissible exclusion.

[MoJo]

3 minutes ago, RatherBeGolfing said:

Student or trainee gaining practical experience in their field of study?

 

"Student" implies part-time, a service condition.

"Trainee" implies a definitive "end" to the course of study (same as "seasonal"), and is a service condition.

Playing devil's advocate here....

 

[RatherBeGolfing]

4 minutes ago, MoJo said:

"Student" implies part-time, a service condition.

"Trainee" implies a definitive "end" tot he course of study, and is a service condition.

Playing devil's advocate here....

Right, but are they impermissible service conditions?  Wouldn't that depend on how the employer structure the internships?  

[MoJo]

4 minutes ago, RatherBeGolfing said:

Right, but are they impermissible service conditions?  Wouldn't that depend on how the employer structure the internships?  

Are you saying that a service based exclusion - can in some cases be a legitimate exclusion from the LTPT rules?  I don't see that at all...  Please explain.

[Peter Gulia]

MoJo and RatherBeGolfing, thank you for your helpful thinking.

For the potential situation I haven’t yet advised on, here’s the employer’s definition or classification:

An intern is anyone who lacks a baccalaureate degree.

I can imagine arguments for and against considering this a subterfuge for a service condition. Here’s just one in each direction. For: Many interns work only seasonally or part-time because it’s demanding to be a full-time employee and a good student. Against: Many interns work a full-time job and do so even when taking a full load of courses in each of fall, spring, and summer semesters.

About a particular plan I’m preparing to advise about, it’s awkward to think about whether a classification might be a subterfuge for a service condition because the plan has no service condition for an employee’s eligibility.

I worry somewhat more that this employer’s classification might be seen as an indirect age condition. While it’s possible to start college at a young age (for example, 16) or finish in fewer than four years, a norm is to start around 18 and finish around 22. And a delay or interruption might mean finishing at a yet older age.

If a plan’s design were my decision, I’d make every intern—even those who don’t meet § 401(k)(2)(D) conditions—eligible for elective contributions.

But it’s not my decision, and I want to get ready to give full-picture advice.

[RatherBeGolfing]

49 minutes ago, MoJo said:

Are you saying that a service based exclusion - can in some cases be a legitimate exclusion from the LTPT rules?  I don't see that at all...  Please explain.

Im playing devils advocate here as well.  We know that you can't exclude "employees normally scheduled to work 20 hours or less per week" since they could work more than "normally scheduled" and complete more than 1,000 hours in the year.  What if the employer's  interns can only work one 6 month period, no repeats?  No excluded intern would be an LTPT because they have at most 6 months of service.  For that employer, would it still be impermissible?

From the discussion portion of the proposed rule (section c item 3)

Accordingly, proposed § 1.401(k)–(c)(3) would clarify that the long-term, part-time employee rules of § 1.401(k)5 do not preclude a plan from establishing an eligibility condition that must be satisfied in order for an employee to participate in the CODA, provided that the condition is not a proxy for imposing an age or service requirement (that is, the condition does not have the effect of imposing an age or service requirement with the employer or employers maintaining the plan) that requires an employee to complete a period of service with the employer or employers maintaining the plan that extends beyond the close of the earlier of the periods described in section 401(k)(2)(D)(i) and (ii).

[MoJo]

22 minutes ago, RatherBeGolfing said:

What if the employer's  interns can only work one 6 month period, no repeats?  No excluded intern would be an LTPT because they have at most 6 months of service.  For that employer, would it still be impermissible?

One 6 month period with no repeats?  They simply would never become an LTPT - which requires two years of 500 hours or more - hence, no need even to exclude them from the plan.  If, however, you do bring one back, you have an issue.

[RatherBeGolfing]

8 minutes ago, MoJo said:

One 6 month period with no repeats?  They simply would never become an LTPT - which requires two years of 500 hours or more - hence, no need even to exclude them from the plan.  If, however, you do bring one back, you have an issue.

I agree.  My point is that I don't think we can say that excluding "interns" is impermissible per se, it depends on whether the exclusion could have the effect of requiring more than 1 YOS&A21.  

Best practice is to avoid it, I just don't think we get to "you cant exclude interns because it implies that they are part-time and therefore its a service based exclusion".

[MoJo]

Just now, RatherBeGolfing said:

I agree.  My point is that I don't think we can say that excluding "interns" is impermissible per se, it depends on whether the exclusion could have the effect of requiring more than 1 YOS&A21.  

Best practice is to avoid it, I just don't think we get to "you cant exclude interns because it implies that they are part-time and therefore its a service based exclusion".

We're not telling clients you "can't" but rather are telling them that whatever exclusions you want, you had better be able to define the group in clear terms that don't include a service component - lest there be a risk of missed deferral opportunities for those excluded.  As I said before, I haven't been able to come up with a definition of "intern" that doesn't fall into the trap of including a service component - and I have a group of very bright people who delight in springing that trap on me when I test out a definition.

[RatherBeGolfing]

Thanks MoJo, I dont disagree with this approach at all.  

[Paul I]

The conundrum with the LTPT rules is the accumulated vocabulary to identify other-than-full-time employees.  This includes part-time, temporary, seasonal, gig worker, contingent, per diem, contingent, trainee, among others.  Similarly, we have cultural inferences that imply an employee likely is other-than-full-time such and is assumed to devote more time to other activities and to have less time available to work .  This includes student, intern, adjunct, among others.  The "we" in my comments above include not only us as practitioners but also includes DOL investigators and IRS agents.

The intent of the LTPT rules is to afford an other-than-full-time employee an opportunity to make 401(k) elective deferrals if they work 500 or more hours in designated 12-month periods. 

The proof that the rules are being followed will be documented in the counting of hours and the offering of the opportunity to defer.  Frankly, this is not substantially different for having to prove that part-timers are excluded unless they work 1000 hours or more, or that employees are regularly scheduled to work x number of hours per week.

With respect to proving an excludable classification that is not service based, ironically, would be helped by having a classification that excludes employees in that classification that do work more than 1000 hours. 

We must keep in mind that there should be a valid business reason for any such classification.  To be tongue in cheek, let's exclude "gophers".

[Luke Bailey]

10 hours ago, Peter Gulia said:

For the potential situation I haven’t yet advised on, here’s the employer’s definition or classification:

An intern is anyone who lacks a baccalaureate degree.

Peter, I would think that works for the right employer, but for many would fail 410(B) testing.

[Peter Gulia]

I've worked with this plan for 17 years. A final-four accounting firm does a full set of coverage and nondiscrimination tests. I've never heard a moment's trouble.

You're right; it's about the nature of the business and the workforce.

[Paul I]

Plans for professional service firms like many law firms and accounting firms rely on coverage of administrative staff to support the coverage for partners.  There are significant numbers of employees working in these firms in roles like the mail room, receptionist, tech support, administrative assistant for example that do not have a baccalaureate degree.

Excluding some of these employees would reduce the number of eligible NHCEs and that could have a significant impact on coverage testing (and can be particularly problematic if the plan uses a new comparability formula).

The takeaway for us all is to consider factors like job descriptions and common characteristics within job descriptions when discussing LTPT employees and non-service-based classifications.  Job descriptions are an integral part of HR, payroll and performance measurement processes and clients will need to assess the impact of making any changes to these processes versus the implications of including or excluding LTPT employees from making salary deferrals.

[MoJo]

15 hours ago, Luke Bailey said:

Peter, I would think that works for the right employer, but for many would fail 410(B) testing.

That *may* work in some situations, but I would caution that the proposed regs indicate that the exclusion *cannot have the effect* of being an age or service based exclusion.  If all of your non-degreed employees are part-time/seasonal, the I think you have a problem.

In addition, there are other areas where it clearly won't work.  Law firm "summer interns/associates," medical techs (x-ray, ultrasound) taking an internship with a hospital for experience (but having a degree), and others.

[Peter Gulia]

MoJo, thank you for your clear thinking.

As I mentioned in my posts Sunday, Tuesday, and Wednesday, I have not yet completed even my preliminary thinking about what advice I might render if I’m asked (and I don’t yet know whether I’ll be asked). All my posts have recognized that the intern exclusion might be a proxy age or service condition; that’s why I invited the discussion.

Here’s the way I’m leaning:

1)  Suggest the plan sponsor amend its plan to make an intern eligible if she is 21 (and perhaps to exclude an eligible intern from matching and nonelective contributions). Don’t condition elective-contribution eligibility on any hours of service.

2)  If the plan is not so or otherwise amended, suggest the plan’s administrator:

assume the Treasury’s proposed rule might be a permissible interpretation not only of IRC § 401(k)(2)(D) but also of ERISA § 202;

assume the plan’s intern exclusion might involve an indirect age or service condition; and

ignore the governing documents’ exclusion if an intern meets ERISA § 202 eligibility conditions.

(That would not bring in many interns because few would be 21 until the summer between one’s third and fourth college years. And not many of them will have had two preceding summers.)

As usual, I’d render full-picture advice about the range of risks and opportunities.

[gc@chimentowebb.com]

Interns can be a legitimate class that would be excludible, subject to 410 participation rules, IMO. 

Be careful about your conservative approach to allow them in for deferrals only. If your plan is a safe harbor, you will blow the safe harbor if anyone in the plan, including your interns, does not get the safe harbor. It's a terrible quirk of the safe harbor regulations that does not allow you break a 401(k) plan into excludible classifications. 

[Bill Presson]

1 hour ago, gc@chimentowebb.com said:

Interns can be a legitimate class that would be excludible, subject to 410 participation rules, IMO. 

Be careful about your conservative approach to allow them in for deferrals only. If your plan is a safe harbor, you will blow the safe harbor if anyone in the plan, including your interns, does not get the safe harbor. It's a terrible quirk of the safe harbor regulations that does not allow you break a 401(k) plan into excludible classifications. 

Not if they enter under the LTPTE regs.

[gc@chimentowebb.com]

Bill, Obviously LPTEs can come in w/o violating the safe harbor. The problem is that many excluded class Per Diems work schedules that are not LPTE. For a hospital with a safe harbor and Per Diems, they can't say that Per Diem LPTEs can defer but that full-time LPTEs cannot defer. The only solution I can think of is to have a deferral-only Plan for the Excluded Class. 

[RatherBeGolfing]

On 12/3/2023 at 8:15 PM, gc@chimentowebb.com said:

Interns can be a legitimate class that would be excludible, subject to 410 participation rules, IMO. 

Be careful about your conservative approach to allow them in for deferrals only. If your plan is a safe harbor, you will blow the safe harbor if anyone in the plan, including your interns, does not get the safe harbor. It's a terrible quirk of the safe harbor regulations that does not allow you break a 401(k) plan into excludible classifications. 

In other words, having more liberal requirements for deferrals to get around LTPTE rules, thus they are NOT excluded solely because of LTPTE rules, so you don't get the benefit of excluding them from SH per the LTPTE rules

1 hour ago, gc@chimentowebb.com said:

Bill, Obviously LPTEs can come in w/o violating the safe harbor. The problem is that many excluded class Per Diems work schedules that are not LPTE. For a hospital with a safe harbor and Per Diems, they can't say that Per Diem LPTEs can defer but that full-time LPTEs cannot defer. The only solution I can think of is to have a deferral-only Plan for the Excluded Class. 

You could probably find another way to define your excluded class.