LTPT rules - anniversary year vs. plan year or calendar year

Our plans all switch to plan year after first anniversary year.  Everything you read talks about 500 hours worked in 2021, 2022 and 2023 implying the hours are counted on a calendar year basis.  

Example: DOH 8/1/2021 and completes 500 hours in first anniversary year.  Since plan eligibility switches to plan year after that, the person is eligible if worked 500 hours in calendar year 2022 and also 500 in 2023, then is eligible 1/1/2024 since worked 500 hours in 3 determination years. Seem right?

Example 2: DOH 8-1-2020 and completes 500 hours in first anniversary year and also 500 hours in calendar year 2021 and 2022 but not in 2023.  Does this person have 3 years since the first employment year started in 2020?  I read "pre-2021" service is excluded.  Does that meant the hours in the first anniversary year worked in 202 are excluded? 

Maybe I'm overthinking.  The more I try to provide specific advice the more questions I have.  Almost all our plans are calendar year.  Seems we should just be able to count calendar year hours - not anniversary year hours.

Does anyone know if FIS will provide a good-faith amendment soon so we can provide clients with a document and SMM?

Tom

Pending any future guidance to the contrary, I do not believe you can just count calendar years (or plan years) for determining LTPT eligibility. IRC 401(k)(15)(D)(ii) and ERISA 202(c)(4) (as added by SECURE 2.0 sec. 125) both indicate that the 12-month period used to determine LTPT eligibility is determined "in the same manner" as for standard eligibility, meaning the 12-month period commencing on the employee's date of hire, and presumably with the option to switch to the plan year only after the first 12-month period.

What I would like to see document providers offer - and I don't know if anyone is planning on doing this yet - is the option to keep the anniversary date measurement period for purposes of determining LTPT eligibility, but switch to plan year for purposes of standard eligibility.

I agree that we should look to the plan's existing eligibility computation period rules and apply them to the LTPTs. 

Presumably, the plan could have different ECP rules for LTPTs simply because plans today can have different ECP rules for different classifications of employees - for example full-time versus part-time.

Trying to use anniversary dates of hire where the date of hire used to determine the ECP shifts after a break in service to the most recent hire date likely would be a nightmare for some employers when applied to LTPTs.  I say this simply because employers have a difficult time deciding if the last day the part-timer worked was a termination date or simply the last day worked with an expectation that the part-timer will work some more in the near future, and the employer does consider the part-timer as having terminated.

4 hours ago, C. B. Zeller said:

Pending any future guidance to the contrary, I do not believe you can just count calendar years (or plan years) for determining LTPT eligibility. IRC 401(k)(15)(D)(ii) and ERISA 202(c)(4) (as added by SECURE 2.0 sec. 125) both indicate that the 12-month period used to determine LTPT eligibility is determined "in the same manner" as for standard eligibility, meaning the 12-month period commencing on the employee's date of hire, and presumably with the option to switch to the plan year only after the first 12-month period.

What I would like to see document providers offer - and I don't know if anyone is planning on doing this yet - is the option to keep the anniversary date measurement period for purposes of determining LTPT eligibility, but switch to plan year for purposes of standard eligibility.

I don't know that the option in your second paragraph is available as the law is currently written, as you point out in your first paragraph.

And if plans are already using one computation period method for most employees, why is it easier to bifurcate the methods? I get that it may allow plans to exclude some employees longer, but it seems to me it's easier to keep all computation periods the same. That way, the only variable is the number of hours. On the other hand, I'm not a recordkeeper.

Here's the thing i suggest we all think about before using employment hours (ever, not just in the LTPT situation).  If you have any significant number of participants (and I leave it to you to identify what is "significant" in your circumstances), you end up with needing hours for these employees all on different years.  Not so hard to get in the first year, but if you had 20 employees and you had to follow their hours for two or three years of employment based on anniversary dates, it might be challenging to do.  I imagine this is sensitive to the vagaries of a company's payroll system, but it's something to consider.  And, then, you need compare the hassle of watching hours this way for a longer time to the hassle of enrolling a LTPT in the plan.  What a Hobson's Choice!

Good point Ilene - thank you.  Yes if LTPT get in earlier due to the shift in plan year, so what really.  There is no detriment to the employer plan such as required contribution (possible audit but that would be rather unusual I believe.)  And the eligibility determination would be much easier as you say.  And an employer does not want to miss eligibility notification and the consequences of that.

With the changes to the top heavy minimum in SECURE 2.0, plus the changes to the way that participants are counted to determine if a plan is exempt from the audit requirement, most of the reasons for keeping employees out of a plan are gone. It would be much simpler, administratively, to allow all employees in immediately, or after some short period of service, less than 500 hours in a plan/calendar year. I think that approach will probably be best for most employers.

For an employer who doesn't fall into that category though, and who does have a reason to keep employees out of the plan for a longer period of time, they are going to be strongly disadvantaged if they switch to the plan year after the first eligibility computation period. For example, say an employer does switch to the plan (calendar) year. An employee who was hired in December 2023, and who works 500 hours in a year, will most likely enter the plan January 2025 - only 13 months after their date of hire, and the same date they would have entered if the plan had only a 1 year/500 hours requirement. Thus the LTPT rule is essentially just requiring this employer to define a year of service as 500 hours instead of 1000 hours for eligibility; it removes the "LT" from the "LTPT."

I think it's a good idea to switch to the plan year most of the time, for the reasons already discussed. However, when you have 2-year eligibility (and this includes the 100% vesting rule for PS and DB plans, not just for LTPT), switching to plan year utterly undermines it.

What might be an even better idea, and I have not looked into the regs to see if this would be permissible, would be for a plan to switch to the plan year only after the second eligibility computation period. That would still preserve the two-year requirement in a meaningful way, but also reduce the recordkeeping burden after the first two years.