What is penalty for long-term part-time failures?

If a plan is found to have not properly included employees who meet the long-term part-time eligibility criteria, what is the penalty?

I would assume it is a missed deferral opportunity and would require correction under EPCRS....

In formal terms:

If an arrangement intended as a § 401(k) arrangement does not meet § 401(k)(2)(D)(ii), the arrangement is not a qualified cash or deferred arrangement.

In the IRS’s view, a plan not administered according to its “definite written program” (including provisions that, as allowed by a remedial-amendment period, are treated as if they had been stated in the plan’s governing documents) is not a § 401(a)-qualified plan.

26 C.F.R. § 1.401-1(a)(2) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401-1#p-1.401-1(a)(2).

In some circumstances, the Internal Revenue Service offers procedures to correct specified failures and restore a plan’s tax-qualified treatment.

If the plan is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), a fiduciary’s failure to administer a plan according to the plan’s governing documents (perhaps including implied provisions) might be a breach of the fiduciary’s responsibility. A fiduciary is personally liable to restore losses and harms that result from the fiduciary’s breach.

In practical terms:

Assuming the failure results from an error or excusable inattention, many employers would correct such an error using an IRS procedure.

As MoJo suggests, the essence of the failure might be that affected employees were denied their opportunities to elect deferrals.

An IRS-recognized correction might be enough that an affected employee does not pursue her ERISA claim.

It will be interesting to see how the IRS reacts to cases where plans do not allow LTPT employees to start deferring come 1/1/2024.  Given the drumbeat about LTPT since SECURE 1.0 and the additional emphasis on LTPT in SECURE 2.0, I imagine the IRS may be less tolerant if a plan is not ready.

If we look at the correction options, the option available to plans with Auto Enrollment could allow a calendar-year plan to start deferrals as late as 10/15/2025 for deferrals that should have started in calendar year 2024.  If the LTPT employees are not eligible for a match, there would be no penalty.  I expect that this will not be acceptable and the IRS will reason that the LTPT rules cannot use this correction method if the AE provisions are not available to the LTPT employees.

Some of the other correction methods will encounter similar issues where the logic behind the correction method does not hold up well for part-time employees.  For example, the first 3-months rule and brief exclusion rule are predicated on an employee being able to make deferrals from future paychecks in an amount that would make up for the missed deferral opportunity.  The underlying assumption is an employee will have recurring paychecks with relatively equal amounts of pay which is not the case for part-time employees.

My guess is the IRS will hold plans accountable to a 50% QNEC correction option and maybe, just maybe, would consider something less.  The challenge here will be determining 50% of what.  If IRS does not recognize the LTPT deferrals as part of an AE plan, then it doesn't make sense to use the AE default percentage.  Since the plan may not have a history of deferrals for LTPT employees, it doesn't make sense to use the NHCE ADP percentage.

Another overall challenge is documenting that each individual LTPT was informed of their eligibility to defer and made a decision about deferring.  The first part of the challenge is identifying who among all of the part-time employees is eligible to defer as an LTPT employee.  The next part is getting information into the possession of each LTPT employee in time to begin deferring upon becoming eligible.  Many will not have corporate email accounts, and many also will not be actively working when the communications are sent out.  The third challenge - assuming that the participation rate will be lower than for non-LTPT employees - dealing with a large number of no-responses.

Just some rambling thoughts.

Is everybody ready to rock and roll?!?

Is anybody ready to rock and roll with this one?

Another question...

If a plan currently provides for EACA provisions, and all participants remain under the EACA so the extended ADP/ACP testing window is permitted, and the plan chooses NOT to automatically enroll LTPTs, any thoughts on whether that will negate the extended testing window?

I am not aware of any specific guidance with respect to the EACA extended testing window. 

I understand that the plan can choose to exclude LTPT employees from ADP/ACP testing which aligns with the idea that the LTPT group is like a plan unto itself.