Secure Act 2.0 LTPT in a nutshell

So can I conclude that what the LTPT rules found in the Secure Act 2.0 are saying is this :

•  If you work between 500~ 999 hours for 2 years then you become eligible to make a salary deferral contribution
•  And... If a LTPT employee does make a deferral we don't need to include them in the ADP test
•  And... they are not eligible for the SH contribution or a profit sharing NEC 

What it is doing is giving them (LTPT ee's) the ability to put some money away for themself if they want when normally they wouldn't be able to due to plan eligibility requirements?  With no real effect on testing?

AND, should the LTPT'ee become eligible eventually (because they meet the plan's eligibility requirements due to working more than 1,000 hours) they would enter the plan as normal?

That's basically the idea, although the intricacies of the guidance are going to have some of the what-ifs.....

And the new guidance also reflects what happens to FLTPT (former LTPT) when they meet the plan's normal eligibility.  They'd be "normal" enough but still get to stay on the 500 hour vesting schedule. That's the part that kinda....sucks?

That is actually not true for 1/1/2024.  IT's laughable how complicated this is (examples assume calendar year plan):

1) For the original SECURE Act service before 2021 is disregarded.  So you need THREE 500 hour years to be an LTPT for 1/1/2024.

2) SECURE 2.0 reduced it to two years BUT they disregarded service before 2023!  So 1/1/2025, anyone with either 3 consecutive years between 2022 and 2024 will be eligible and anyone with 2 consecutive years in 2023 or 2024 will be eligible (I suppose that should be the same list of people).  And it's even more complicated than that of course because everyone's first 12 months of employment is the first year needing review. [edited this paragraph for correction 12/29/2023]

The estimated rate of compliance nationwide by yours truly is somewhere between 2 and 3%.This was legislative malpractice.

I will point out that Derrin Watson mentioned on an LTPT training that you can utilize hours equivalencies (190 for each month is my suggestion) which will take almost all of the guess work out of the eligiblity reviews (you can use it exclusively for applying LTPT rules).  You can predict the first day of which plan year someone will be an LTPT based solely on their hire date (assuming you can comfortalby assume they will work at least 1 hour in 3 out of any 12 month window).  BTW, why would the IRS disagree with that position and make it harder for people to have access to payroll deduction contributions?  Wouldn't that be a hoot considering the point of the law in the first place!  I've basically told my clients "do this or your going to sink." 

And anyone who says the recordkeepers will track it I'm sure has underestimated how much information they need.  One recordkeeper sent an email out last week that basically said "if yo uwant us to track you need to tell us how many consecutive years they have" or something like that.  And what if your client moved to the recorkdeeper in 2022?  Or what if they didn;t have a payroll bridge with all the necessary data until 2023?

Tell me pessimism is not justified... [I will point out that my firm went absolutely full-tilt for 3 months to amend plans to avoid these rules].

16 hours ago, austin3515 said:

[I will point out that my firm went absolutely full-tilt for 3 months to amend plans to avoid these rules].

How did you avoid the rules?  Amend the eligibility requirements, hours of service?

1) 500 hours in 12 months for all eligibility to keep admin as similar as possible to what they have now. If everyone (or almost everyone) works 20 hours a week (which is common for most employers) then the eligible group barely changes.  this is key for a top-heavy safe harbor match plan because it preserves the top-heavy exemption which is critical.

2) For plans that are not top-heavy, or for plans that are top-heavy but are already providing the top-heavy minimum (e.g., 3% SHNEC), change 401k eligibility to 3 months elapsed time (or 2 or 6, or even 12) and then leave the employer eligibility completely unchanged.  Take for example law firms and medical practices who all wanted to have 3 month eligibility for 401k for their new doctors and lawyers but did not because they didn't want to provide the top-heavy minimum from day 1. SECURE 2.0 eliminated THMs for otherwise excludables, so literally every client so described elected this approach.

The only clients we had who opted for the LTPT rules were top-heavy safe harbor match plans who could not expand eligibility because there were too many people between 500 and 1,000 hours. LTPT was the only way to comply and maintain that critical top-heavy exemption.  This is again legislative malpractice because more than one client asked if they could just have 3 months eligibility for 401k and leave match at a year and I told them, no you have to keep them out for 2 years otherwise you will be punished in the form of a top-heavy minimum.  So those folks will just have to wait to be offered the plan because the people writing the rules didn't understand the motivations of plan design and how important it was to avoid top-heavy minimums.

But you're a little late.  Come Monday (what a great name for a song!!), the LTPT's will already be eligible and you'll be stuck with that ridiculous rule that anyone who becomes a participant based on those rules is forever required to vest in any employer contributions they might one day accrue based on 500 hours a year.  If the "fixes" I described above were implemented effective as of 1/1/2024 that could have been avoided.

I have to criticize some of the folks who were writing all of these articles. For years I read these articles and they all described in detail how employers had to find ways to track this stuff.  I kept saying "Why aren't any of these authors saying this can all be avoided with some minor tweaks to eligibility??"  They did not focus at all on how a plan might avoid these rules altogether.  Not even after SECURE 2.0 fixed the top-heavy minimums for otherwise excludables.  As a result not enough attention was paid to this approach and I think most plans are going to be stuck with this mess for years because of those vesting rules.  

19 hours ago, austin3515 said:

2) SECURE 2.0 reduced it to two years BUT they disregarded service before 2023!  So 1/1/2025, anyone with either 3 consecutive years between 2022 and 2024 will be eligible and anyone with 2 consecutive years in 2023 or 2024 will be eligible (I suppose that should be the same list of people).  And it's even more complicated than that of course because everyone's first 12 months of employment is the first year needing review. [edited this paragraph for correction 12/29/2023]

emphasis mine

What?  I don't think I've seen it interpreted that way.

Sec 125 of SECURE 2.0

“(4) 12-MONTH PERIOD.—For purposes of this subsection, 12-month periods shall be determined in the same manner as under the last sentence of subsection (a)(3)(A), except that 12-month periods beginning before January 1, 2023, shall not be taken into account.”.

Not an interpretation, a direct quote 👍

https://www.seyfarth.com/news-insights/the-long-wait-for-the-long-term-part-time-guidance-is-over.html

Beginning in 2024, under the SECURE Act, 401(k) plans are required to permit part-time employees who perform work for at least 500 hours of service over three consecutive years to contribute to a 401(k) plan.  SECURE 2.0 expanded part-time employee eligibility even further, providing that employees who work for at least 500 hours of service over two consecutive years must be eligible to contribute to a 401(k) plan beginning in 2025. Employees who meet these eligibility standards are referred to as “long-term part-time” employees, or LTPT employees, throughout. 

Thanks!

3 hours ago, austin3515 said:

500 hours in 12 months for all eligibility to keep admin as similar as possible to what they have now. If everyone (or almost everyone) works 20 hours a week (which is common for most employers) then the eligible group barely changes.  this is key for a top-heavy safe harbor match plan because it preserves the top-heavy exemption which is critical.

Last time I checked, 500 was less than 1000, and 500 hours in 12 months is roughly equivalent to 10 hours a week. If you don't have anyone in the 500-1000 group, then why bother? I can't say I paid too much attention to the details so I'm probably missing something...

20 hours ago, austin3515 said:

2) SECURE 2.0 reduced it to two years BUT they disregarded service before 2023!  So 1/1/2025, anyone with either 3 consecutive years between 2022 and 2024 will be eligible and anyone with 2 consecutive years in 2023 or 2024 will be eligible (I suppose that should be the same list of people).  And it's even more complicated than that of course because everyone's first 12 months of employment is the first year needing review.

@austin3515, I am not sure that this is true.  SECURE 2.0 Act §125(a)(1) modifies ERISA §202 to add the LTPT requirements (making them an enforceable right and extending the rules to 403(b) plans.  The new ERISA §202(c)(1)(B)(i) adds the 2-consecutive year rule and the new §202(c)(4) provides that periods prior to 1/1/23 may be disregarded for the purposes of that section.  However, SECURE 2.0 §125(a)(2) also modifies Code §401(k)(2)(D)(ii) to reduce the eligibility requirement from 3 to 2 consecutive YOS, but it does not modify the rule in SECURE (1.0) Act §112(b) that excludes service prior to 1/1/21 for purposes of Code §401(k)(2)(D).

That is, if an employee (at least age 21) works 750 HOS in 2021 and 750 HOS in 2022, but less than 500 HOS in 2023 and 2024, that employee would be eligible to enter the plan on 1/1/25 based on the requirements in the Code, when the requirement is reduced to 2 YOS.  You are reading the 2023 limit for the ERISA provision and applying it to the CODE provision, but unfortunately, IMO, that is incorrect.

1 minute ago, Bird said:

Last time I checked, 500 was less than 1000, and 500 hours in 12 months is roughly equivalent to 10 hours a week. If you don't have anyone in the 500-1000 group, then why bother? I can't say I paid too much attention to the details so I'm probably missing something...

I applied the logic in exactly the opposite direction.  If no one is between 500 and 1,000, doing the amendment does 2 things:

1) It doesn't change who is eligible at all.

2) It allows me to never ever ever have to review those abhorrent rules for anhything.

I apply the same logic to top-paid group actually.  Sometimes I will encounter a plan that has made that election when 5 people out of 100 make more than HCE cap.  I always eliminate top-paid group even though it makes no difference so I don't have to document every year that it doesnt make a difference.

HAve I had the same conversation 100 times with 100 people? Sure.  Other reasonable approaches are out there, but I did not want my clients to even have to know the term.

3 minutes ago, David Schultz said:

@austin3515, I am not sure that this is true.  SECURE 2.0 Act §125(a)(1) modifies ERISA §202 to add the LTPT requirements (making them an enforceable right and extending the rules to 403(b) plans.  The new ERISA §202(c)(1)(B)(i) adds the 2-consecutive year rule and the new §202(c)(4) provides that periods prior to 1/1/23 may be disregarded for the purposes of that section.  However, SECURE 2.0 §125(a)(2) also modifies Code §401(k)(2)(D)(ii) to reduce the eligibility requirement from 3 to 2 consecutive YOS, but it does not modify the rule in SECURE (1.0) Act §112(b) that excludes service prior to 1/1/21 for purposes of Code §401(k)(2)(D).

That is, if an employee (at least age 21) works 750 HOS in 2021 and 750 HOS in 2022, but less than 500 HOS in 2023 and 2024, that employee would be eligible to enter the plan on 1/1/25 based on the requirements in the Code, when the requirement is reduced to 2 YOS.  You are reading the 2023 limit for the ERISA provision and applying it to the CODE provision, but unfortunately, IMO, that is incorrect.

FWIW I agree with your 2nd pargraph 100%.  But your first paragraph in my opinion proves my main point which is "folks, run for the hills!"  If you can understand the impressive intellect that David Shultz has put forth, then you're a smarter person than I am (I was lost!).  But I was smart enough to run like H-E- double hockey stick in the other direction 👍.  You should too...

1 minute ago, austin3515 said:

FWIW I agree with your 2nd pargraph 100%.  But your first paragraph in my opinion proves my main point which is "folks, run for the hills!"  If you can understand the impressive intellect that David Shultz has put forth, then you're a smarter person than I am (I was lost!).  But I was smart enough to run like H-E- double hockey stick in the other direction 👍.  You should too...

I get where you are coming from but there are pros and cons.  LTPT certainly does add more moving parts and complexities, and with those come risks.  But making everyone eligible immediately, or after completing 500 HOS, has it's downsides too (testing. top-heavy, and employer contributions applying to the otherwise excludable employees who could be excluded from all of that if treated as LTPT).  You and your clients will need to weigh those pros and cons and decide what's best for you.  Personally, I am a fan of anything that gets more participants and money into plans!

1 minute ago, austin3515 said:

FWIW I agree with your 2nd pargraph 100%.  But your first paragraph in my opinion proves my main point which is "folks, run for the hills!"  If you can understand the impressive intellect that David Shultz has put forth, then you're a smarter person than I am (I was lost!).  But I was smart enough to run like H-E- double hockey stick in the other direction 👍.  You should too...

Wait a minute I do not agree with your 2nd paragraph.  In your example they did not have 3 consecutive years.  And under SECURE 2.0 they did not have 2 consecutive years, because verbatim what SECURE 2.0 says is 12 month periods before 1/1/2023 are disregarded.  Now if you're saying that some circuitious trip through ERISA and the Code brings us to some other conclusion, I can promise you everyone has missed it.  My interpretation seems to line up with the Seyfarth article I pasted in.  I think they're a big law firm, arent they?  I'd be surprised if they were wrong anyway.

2 minutes ago, David Schultz said:

I get where you are coming from but there are pros and cons

The conversation with clients was pretty straightforward.  Across the board as I explained the rules and what would be required, they all agreed iut should be avoided at all costs.  I promise we did not increase the cost of employer contributions, nor did we degrade testing, by much for anyone.  Those things are obviously front and center in the conversations and they very easily addressed through otherwise excludable rules and the new top-heavy rule for otherwise excludables.  It's not that hard to find excellent solutions and the vast majority of the time the increase in employer contributions is exactly ZERO and the degradation to testing is the same.

The one excpetion as I have referenced before is those top-heavy safe harbor match plans with a lot of people between 500 and 1,000. For them, the LTPT is the only viable option.

13 minutes ago, austin3515 said:

Wait a minute I do not agree with your 2nd paragraph.  In your example they did not have 3 consecutive years.  And under SECURE 2.0 they did not have 2 consecutive years, because verbatim what SECURE 2.0 says is 12 month periods before 1/1/2023 are disregarded.  Now if you're saying that some circuitious trip through ERISA and the Code brings us to some other conclusion, I can promise you everyone has missed it.  My interpretation seems to line up with the Seyfarth article I pasted in.  I think they're a big law firm, arent they?  I'd be surprised if they were wrong anyway.

I disagree (and used this very scenario in a recently published Journal of Pension Benefits article on the LTPT legislation).  To clarify my earlier comment:

• The pre-2023 service exclusion was added by S2.0 to the parallel ERISA provision (which is new and was added to extend LTPT coverage to 403(b) plans) - this is the S2.0 provision you quote above, but it only applies to the ERISA provision and 403(b) plans. 
• The Code (401(k)) provision, was amended by S2.0 to change the requirement from 3 to 2 years, but it did not change the rule that only service periods starting before 1/1/21 are excluded for purposes of that provision (again, this only applies to 401(k) plans, pre-2023 service periods are excluded for 403(b) plans). 

I am confident that I am not alone in this interpretation.  (I am pretty certain Ilene Ferenczy, Derrin Watson, and Robert Richter all concur with this interpretation, although I only speak for myself). I can say that Relius and Omni are being designed to determine eligibility in this manner.

And I do not read that Sayfarth article to disagree with my interpretation.  A fundamental principal of service crediting is "all service counts" (credit to Robert Richter).  The only time prior service does not count is if there is a rule that excludes it (such as a break-in-service rule or a law, such as SECURE Act §125(b)) which provides that pre-2021 service is excluded for purposes of the LTPT rules that apply to 401(k) plans.  The Seyfarth article is saying that in 2025 the service requirement is reduced from 3 to 2 consecutive YOS.  But I see nothing in the law, regs, or Seyfarth's article that says pre-2023 service is excluded for purposes of applying the 2 consecutive YOS requirement. 

I do not wish to be argumentative, but I think this is an important point to ensure everyone understands correctly (and I agree, this is a PITA result):  When the S2.0 change from 3 to 2 consecutive YOS kicks in, my interpretation is that anyone with 500 - 999 HOS in 2 consecutive 12-month periods that begin on/after 1/1/21 will be eligible to enter as a LTPT (assuming they were at least age 21 when they completed that 2nd consecutive YOS).  Those consecutive periods can include 2021 and/or 2022.

5 hours ago, austin3515 said:

But you're a little late.  Come Monday (what a great name for a song!!), the LTPT's will already be eligible and you'll be stuck with that ridiculous rule that anyone who becomes a participant based on those rules is forever required to vest in any employer contributions they might one day accrue based on 500 hours a year.  If the "fixes" I described above were implemented effective as of 1/1/2024 that could have been avoided.

Austin - totally agree with you that these rules are a nightmare. The more I look at them, the more complicated they seem. I will also say that we rushed to amend some plans by year-end to avoid the LTPT rules because we determined those were discretionary changes. However, I don't think we had to for our pre-approved plans. Notice 2024-02 (which of course was issued last minute), Q & A J-1(a), says that the deadlines to amend an eligible retirement plan... for the applicable provisions of the Acts, or any regulations thereunder, which apply to both required and discretionary amendments are hereby extended to (basically) 2026. See also footnote 16, which says: "With respect to pre-approved plans, the extended plan amendment deadlines apply to both interim (required) and discretionary amendments." 

22 hours ago, austin3515 said:

I will point out that Derrin Watson mentioned on an LTPT training that you can utilize hours equivalencies (190 for each month is my suggestion) which will take almost all of the guess work out of the eligiblity reviews (you can use it exclusively for applying LTPT rules). 

If you attended the same training I did, look at slide 67: "According to preamble, extended deadline includes amendment to Normal Requirements to avoid the LTPT rule. Example: Plan changes from 1 YOS to immediate eligibility."

This is what we did with some clients, but now I think we could have waited. 

Service performed before January 1, 2023, is not considered for purposes of this new SECURE 2.0 rule (but may need to be counted for vesting purposes, see below).

https://www.ballardspahr.com/insights/alerts-and-articles/2023/11/long-term-part-time-employee-participation-in-401k-plans-begins-in-2024

That article isn't entirely accurate. It's correct that under ERISA, service prior to 1/1/2023 is not considered (it was added to apply the LTPT rules to ERISA 403(b) plans). But SECURE 2.0 didn't add a similar exclusion to the IRC. So, the  original SECURE provision continues to apply to 401(k) plans (only service prior to 1/1/2021 is disregarded). 

This example is so spot on and agrees with David Schultz and G8Rs...  Every other article I read on this did not go into enough depth to make it clear why it was 2025.  I always thought it was because you needed at least 2023 and 2024 to be eligible (due to the pre 2023 exclusion), not that it was the delayed effective date of the provisions that made it 2025.

https://www.truckerhuss.com/2023/09/long-term-part-time-workers-more-questions-than-answers-for-defined-contribution-plans/#:~:text=Section 125 of SECURE 2.0%3A LTPT&text=Pre-2021 service is also,governed 403(b) plans.

Examples

1. When is an employee eligible to enter a calendar year 401(k) plan if the employee has 500 hours in 2021, 500 in 2022, and 450 in 2023?

    

   Answer: The employee would enter the 401(k) plan on January 1, 2025. Under SECURE 1.0, this employee does not meet the 3-year rule as of the end of 2023; therefore, the employee is not eligible to participate as of January 1, 2024. Under SECURE 2.0, effective for plan years beginning on and after January 1, 2025, the 3-year rule is reduced to two years; therefore, this employee has satisfied the new rules for eligibility (based on performing at least 500 hours of service in 2021 and 2022), and will become eligible for participation as of January 1, 2025.

   Note: For 401(k) plans, service performed prior to 2021 is excluded. For 403(b) plans, service performed before 2023 is excluded. The LTPT rule under SECURE 1.0 does not apply to 403(b) plans. SECURE 2.0 extended the LTPT rule to 403(b) plans. Therefore, if the plan in the above example were a 403(b) Plan, the employee would not be eligible for the plan, as service performed under a 403(b) plan prior to 2023 is excluded for purposes of the LTPT rule

Also the Proposed Regs seem to line up with this too.

"(2) Determination of 12-month periods—(i) In general. Except for any 12-month period beginning before January 1, 2021, all 12-month periods during which an employee is credited with at least 500 hours of service with the employer or employers maintaining the plan must be taken into account for purposes of determining whether an
employee has satisfied the requirements of paragraphs (b)(1)(i)(A) and (B) of this section."
 

On 12/30/2023 at 4:35 PM, austin3515 said:

Every other article I read on this did not go into enough depth to make it clear why it was 2025.

The many articles floating around have created quite the issue.  They had people convinced that the first LTPTs would enter on 1/1/24 when the first LTPTs could have entered as early as February 2023 (I suppose January 2023 could be possible but I haven't seen an example).  Oversimplification and lack of guidance until late 2023 was a bad combination.

On 12/29/2023 at 3:21 PM, David Schultz said:

I am pretty certain Ilene Ferenczy, Derrin Watson, and Robert Richter all concur with this interpretation, although I only speak for myself

I think we can add Kelsey Mayo to that list as well.   I have a very short list of trusted sources (Brad Pitt is on the list) on this topic.  We should all be very careful with articles/blogs aimed at a wide audience, as they tend to skip some of the more technical issues that are too complicated for a wide audience.  You could easily spend an entire article just discussing the "shift to plan year" issue, and many non-industry readers still wouldn't understand it. 

I was wondering if Brad Pitt was working under an alias 🤣

I've only gotten to "know" Kelsey Mayo recently from some webinars but she is definitely excellent as well 👍

David Schultz doesn't like cameras too much and Brad is much better looking than he is...

Agreed; I know that Kelsey agrees as well.  I am just cautious into who's mouth I put my feet.  And, yes, Kelsey knows her stuff - no doubt about that.

I couldn't agree more that the complexities and "newness" of the issues here, along with a lack of guidance and a lot of articles that provide high-level analysis, can be dangerous.  Though as the author of some of those articles (which I would argue went into more depth than most but still didn't uncover every possible issue), I will note that it is an iterative/takes-a-village process to walk down all of the paths and determine all of the potential operational issues for something so new and different (indeed, my articles have specifically called out that the devil is in the details).  I've spoken with Kelsey, Robert, Derrin, Ilene, and many others about these topics in emails, phone calls, at dinner, and over drinks (I really need to get a life), and we are all still finding new issues and complications daily.  

I asked Derrin about that section austin quoted and if/how that affects what he said in an ERISApedia webcast about 401k plans still having to go back to post-2020 years.  I won't quote him directly since I don't know how much trouble I'd get in for that (I did just take an Ethics CE), but he reiterated that despite what that looks like it says, you  go back to years beginning after 2020 for 401k plans and years beginning after 2022 for 403b plans.

9 minutes ago, AlbanyConsultant said:

but he reiterated that despite what that looks like it says, you  go back to years beginning after 2020 for 401k plans and years beginning after 2022 for 403b plans

I feel better that I was tricked that Derrin and Brad Pitt both say is very misleading, LOL. I will just add though that the regs themselves make it a heck of a lot clearer.

47 minutes ago, David Schultz said:

I've spoken with Kelsey, Robert, Derrin, Ilene, and many others about these topics in emails, phone calls, at dinner, and over drinks (I really need to get a life), and we are all still finding new issues and complications daily.  

"Dad, I don't care that the IRS dropped a new rule, can't I just eat my happy meal and build my lego's?!?!"

happens way too often...

I still maintain that there is one thing that has been clear from the get-go.  if you can find a way to get out from under these rules (and there is almost always a near-cost free solution) than you should take it.  To me this thread has proven that beyond the shadow of a doubt.

Thanks the education!!

I've decided that from my purely personal TPA viewpoint, SECURE/SECURE 2.0 are misnomers.  I call it TERISA. (The Early Retirement Incentive Stupidity Act.)

The timeframe keeps getting shorter...

1 hour ago, Belgarath said:

The Early Retirement Incentive Stupidity Act

I wish...  I have high hopes for SECURE 3.0 though!

And it changes the vesting schedule for these LTPT folks!

Also, for 403(b), try to avoid the 20 hour exclusion and all qualify for deferrals without regard to hours counting due to Universal Availability.