SECURE - LTPT EEs - Interns?

So I have a plan sponsor come back to tell me that their plan excludes interns (which it does) and she is asking if the interns they have would be considered Long Term Part Time Employees.

So this is a good question.  These interns are W-2 employees.

I would think that we cannot exclude interns, unless they work less than 500 hours per year in the look back years?  I have no clue who they are or what hours they have worked, she only said "we do exclude interns and our interns stay on forever..."

Would interns fall under the "long term part time employee" category, or can they still be excluded?

While you’re helping your client consider its decision-making, consider—among many points—this question:

What bad consequence would or might result if these employees become eligible to elect deferrals but are excluded from all employer-provided contributions?

1 hour ago, doombuggy said:

Would interns fall under the "long term part time employee" category, or can they still be excluded?

Whether they are an LTPT or not depends on whether they meet the requirements under either S1.0 or S2.0.   We still need guidance on whether they can be part of a class exclusion. 

Consider that whether an employee must be eligible involves not merely a condition of tax-qualified treatment but further an ERISA title I command.

ERISA § 202(c)    Special Rule for Certain Part-time Employees.—

(1)   In general.  A pension plan that includes either a qualified cash or deferred arrangement (as defined in section 401(k) of the Internal Revenue Code of 1986) or a salary reduction agreement (as described in section 403(b) of such Code) shall not require, as a condition of participation in the arrangement or agreement, that an employee complete a period of service with the employer (or employers) maintaining the plan extending beyond the close of the earlier of— (A) the period permitted under subsection (a)(1) (determined without regard to subparagraph (B)(i) thereof); or (B) the first 24-month period— (i) consisting of 2 consecutive 12-month periods during each of which the employee has at least 500 hours of service; and (ii) by the close of which the employee has met the requirement of subsection (a)(1)(A)(i).

. . . .

If a plan’s governing documents omit a provision ERISA’s title I requires, a court will, and a fiduciary should, interpret the plan as if it includes the required provision.

See, for example, Lefkowitz v. Arcadia Trading Co. Ltd. Benefit Pension Plan, 996 F.2d 600, 604 (2d Cir. 1993); Gallagher v. Park West Bank & Trust Co., 921 F. Supp. 867 (D. Mass. 1996).

If a plan’s administrator must decide something when ERISA § 202’s command is uncertain, the administrator must interpret the plan and applicable law.

(Even if the IRS releases some subrule guidance before 2024 and one looks to Reorganization Plan No. 4 of 1978 to treat the guidance as an interpretation also of ERISA § 202, answers to questions of the kind RatherBeGolfing mentions might be uncertain for a few or many years.)

An administrator must form its interpretation according to the obedience, exclusive-purpose loyalty, and experienced prudence ERISA § 404(a) commands.

The "bad consequence" that pops into my head first is that they might qualify for the "500 hours for vesting" rule, and yes that shouldn't matter if they aren't eligible for employer contributions, but then later become a full time employee who gets employer contributions, and ends up subject to a better vesting schedule than someone who'd been "regular full time" from Day 1.

Bri, do you think that vesting trap can be avoided by making all employees eligible for elective deferrals, with no eligibility service condition?

IRC § 401(k)(15)(B)(iii) about vesting applies only to “an employee described in clause [401(k)(15)(B)](i)[.]”

That clause refers to “employees who are eligible to participate in the [§ 401(k) cash-or-deferred] arrangement solely by reason of paragraph [401(k)](2)(D)(ii)[.]”

If an employee did not become eligible for elective deferrals because of § 401(k)(2)(D)(ii), wouldn’t the plan determine vesting service without any variation from § 401(k)(15)(B)(iii)?

Or is there something I’m missing?

19 hours ago, RatherBeGolfing said:

We still need guidance on whether they can be part of a class exclusion. 

FWIW, Ms Kelsey Mayo spoke on this at ASPPA yesterday and she said that she believes a class exclusion can be used if it's legitimate and not just a cover for everyone that works 500-1000 hours. The examples she used were job description and location.

Peter, I agree that if you're going to essentially overshoot the LTPT rule and be extra generous like that with the deferral eligibility, that you won't have a vesting problem where some might be 500 and some might be 1000.  I'd be concerned about other unintended consequences, but haven't thought them out too much.

“Our interns stay on forever”? They stay an intern forever? What then are they interning for? They mean that after a period of internship, they go full time, right?

John, that was my first thought - are they truly interns or is that classification being used to exclude part-time employees who may ultimately work 1000 hours? I guess someone might intern at the same company for their entire college career, or maybe the employer's industry is one where long term internships are normal (but isn't that more apprenticeship?) - and do these "interns" usually get hired into benefit-eligible positions or are they longer term term temporary labor? Probably not the TPA's concern here but certainly a situation I'd call a head-scratcher.

Bill Presson, thanks for that FYI from ASPPA annual.  I did not attend this year.

John, I did email the plan sponsor to ask her about the interns and her comment.  They are an engineering firm, so it is possible that they are college students on the 5 year plan, but I specifically asked what happens - do they terminate, or move on to F/T?

17 hours ago, CuseFan said:

John, that was my first thought - are they truly interns or is that classification being used to exclude part-time employees who may ultimately work 1000 hours? I guess someone might intern at the same company for their entire college career, or maybe the employer's industry is one where long term internships are normal (but isn't that more apprenticeship?) - and do these "interns" usually get hired into benefit-eligible positions or are they longer term term temporary labor? Probably not the TPA's concern here but certainly a situation I'd call a head-scratcher.

Sponsor responded:

Interns typically do work over 1000 hours.  Interns can work anywhere from 4 (approximately a semester) months – 2 years around here until they graduate and get another job or we hire them. 

So based on comments from the ARA Director of Regulatory Affairs at ASPPA annual this week (see Bill Presson's comment above) that the class exclusion is legitimate and should still hold - meaning these student interns will not fall under the LTPT employee rule.  If the company hires them, they would enter the plan as a f/t employee.

Agreed, especially if interns are students - a two-year internship is not "forever" even though maybe longer than the norm, the client's initial phrasing was misleading. Sounds like it's all squared away now.

7 hours ago, doombuggy said:

So based on comments from the ARA Director of Regulatory Affairs at ASPPA annual this week (see Bill Presson's comment above) that the class exclusion is legitimate and should still hold - meaning these student interns will not fall under the LTPT employee rule.

To be clear, Kelsey said that in her opinion it should be OK as long as the class is otherwise OK to exclude.  In other words, you can't invent a new division B that just happens to be all your LTPTs, base the exclusion on service, or a disguised service exclusion.  She also said that we have no idea if the IRS guidance will allow the exclusion of LTPT by class.

Just adding a bit more context here since it was an opinion answer rather than here is what will or is likely to happen.

The issue of class exclusions for LTPT that are not based on service remains a known unknown.  At a TE/GE regional conference in August I asked the IRS panel this question.  The response was the IRS is concerned that classes would be constructed to exclude LTPT employees contrary to the intent of Congress.  This last part was emphasized.

The IRS continues to say they expect to release guidance before the end of the year.

13 minutes ago, Paul I said:

The IRS continues to say they expect to release guidance before the end of the year.

So Friday 12/29 right?

To many people thinking about the public-policy point, it’s not obvious why an employer wants to exclude an employee from what anyone but the most knowledgeable retirement-plan practitioners might perceive as allowing little or no more than an opportunity to save for retirement from the employee’s wages.

Those who hope for IRS guidance that a plan may exclude employees on some ground other than (and not a subterfuge for) a measure of service might consider informing the IRS about an employer’s reasons for excluding an employee.

Consider that the IRS’s lawyers don’t have the daily lived experience of third-party administrators.

Even those IRS lawyers with previous work experience in law, accounting, or consulting firms, or inside a retirement-services provider, might lack experience with the kinds of employers and kinds of plans that raise an issue or concern that might be a plan sponsor’s reason for excluding an employee.