LTPT Exhaustion

[thepensionmaven]

Accountant has approached us for best scenario to avoid LTPT, as he says “who do you know that’s works between 500-1000 hours that can afford to defer”

1. Amend plan to use elapsed time for eligibility, 1 year with no hours for entry, require 1000 hrs for any employer contribution

2. Age 21, 500 hrs eligibility for deferrals, Age 21, 1,000 hrs for employer contribution

3.  Employees signs the enrollment form with a $0 deferral each pay period  OR

4.  Corporate resolution stating the plan sponsor is electing out of the LTPT provisions

Curious to see if any of these are being considered or are being used already.

[Peter Gulia]

IF a plan sponsor’s goal is to help the plan’s administrator avoid a need to determine whether an employee is eligible to elect between money wages and § 401(k) elective deferrals BECAUSE she is a long-term-part-time employee, one would set the plan’s age, service, and other conditions on eligibility to elect deferrals so every employee who could be described in § 401(k)(2)(D)(ii) always would meet the plan’s conditions.

Here’s why some employers might not choose that simple way. For employees who are eligible ONLY as necessary to meet tax law’s condition regarding long-term-part-time employees, a plan need not provide nonelective or matching contributions, and may exclude the otherwise excluded long-term-part-time employees from some specified coverage and nondiscrimination measures. Yet, those exceptions apply only if the employees “are eligible to participate in the [cash-or-deferred] arrangement SOLELY by reason of [§ 401(k)](2)(D)(ii)[.]”

Sources: ERISA §§ 202(c), 203(b), IRC §§ 401(k)(2)(D), 401(k)(15), 416(g), SECURE 2019 § 112, SECURE 2022 § 125; Long-Term, Part-Time Employees Rules for Cash or Deferred Arrangements Under Section 401(k) [proposed rule], 88 Federal Register 82796 (Nov. 27, 2023).

This is not advice to anyone.

[thepensionmaven]

I assume that wiykd be, as I mentioned, eligibility 500 hours for deferrals, 1999 for employer non-elective and profit sharing?

Allocations for employer PSP can remain last day and 1,000 hous?

[David Schultz]

Just curious, what is the accountant trying to accomplish (or, perhaps the questions should be why are they trying to accomplish that)?  If the CPA expects that no 500-999 HOS participant is going to defer, isn't having them treated as LTPT (excludable from nondiscrimination testing and top-heavy minimum contributions) better than amending the plan to bring them in as traditional participants (where they drag down the test results and may have to receive an employer contribution).  It seems to me that the desire to avoid LTPT status is likely to cost the employer more in the long run.  I don't see the benefit...

[thepensionmaven]

We're trying avoid LTPT rules altogether, which, most will admit, are too onerous and very few, if any employees would contriubte.

Each participant completes a salary deferral option form with two check boxes, to which only one applies:

"I wish to contribute $  _______ per pay period

" I wish to contribute  _____% of my pay each pay period

Would not 0% or $0 suffice for the 401(k) portion??