Super fascninating question - Owners Child is an LTPT

Owners child works part-time and has not met 1,000 hours in 12 months, but they are now an LTPT.  I can exclude LTPTs from ADP testing.  So the kid can contribute 50% of pay, right?

Is this too good to be true?? Maybe there is something that says otherwise but it's something that never even crossed my mind until I saw it happen this morning..

yes. The feedback I've gotten from small plan sponsors has been just this kind of scenario. A relative of the owners hasn't been able to be part of the plan, but will be able to due to the LTPT rules and they are excited for the opportunity to defer. 

Why the 50% of pay restriction? Is that part of the LTPT rules? I haven't seen that, but could be I missed it. Or does the specific plan have a restriction?

Most all the plans I work with allow up to the 402(g) limit. 

4 minutes ago, justanotheradmin said:

Why the 50% of pay restriction? Is that part of the LTPT rules? I haven't seen that, but could be I missed it. Or does the specific plan have a restriction?

That was just a crazy example where absent this rule the testing would be catastrophic, LOL.  This is really kind of neat and may be a great reason to adopt the LTPT  rules in certain cases.

LOL...  99.99% bad, .01% good 🤣

Just make sure that truly a LTPT and don't get caught any of the gotchas where they could be an otherwise excludable instead. Didn't mean to add the threat of rain on your parade, sorry. Just saying check the complete weather report before leaving the umbrella at home.

23 hours ago, austin3515 said:

LOL...  99.99% bad, .01% good 🤣

I'll take the under on the .01% good:)

In all seriousness, the situation you outlined is the only potential positive I can see in the LTPT rules. Other than that. LTPT is an absolute nightmare from an administration standpoint and plan sponsors are not going to do it correctly. The eligibility rules are far more complicated than they need to be--if all you had to do was determine if the employee in question worked 500 hours in the plan year for 3 (or 2 starting in 2025) consecutive plan years, it would be mostly doable. But these eligibility rules are insanely complicated IMO. If I feel that way, how is a plan sponsor supposed to understand them?

Maybe plan sponsors will no longer list their spouses with 1000 hours every year only to justify their deferring.  Put them in at 501 and it's more believable, too.  I'm sure we've all seen the spouse deferring 92.35% of pay and attempting to ruin a perfectly good average benefits percentage test.

If a business owner’s spouse’s or child’s work is not measured with time records, might one reach 1,000 hours of service by working once in each of six months of the year?

29 C.F.R. § 2530.200b-3(e)(1)(iv) https://www.ecfr.gov/current/title-29/part-2530/section-2530.200b-3#p-2530.200b-3(e)(1)(iv).

29 C.F.R. § 2530.200b-2(a)(1) https://www.ecfr.gov/current/title-29/part-2530/section-2530.200b-2#p-2530.200b-2(a)(1)

But if a plan’s design lacks safe harbors, is there value in finding a spouse or child is eligible only as a long-term-part-time employee?

The eligibility service rules in the plan can be a potential trap for the unwary.  A lot of plans with an hours requirement do not select an hours equivalency so the plan should use actual hours.  If the plan does specify an hours equivalency, then the choice of the equivalency can, as @Peter Gulia notes, significantly accelerate a participant being credited with 1000 hours.

Elapsed time rules carry their own risk.  Effectively, the plan does not look at consecutive plan years with at least 500 hours under the proposed LTPT rules:

"this proposed regulation does not include an amendment to the elapsed time rules under § 1.410(a)–7. Therefore, a plan may not require an employee, including an employee  who is classified as a part-time employee, to complete more than a 1-year period of service under the elapsed time method in order to be eligible to participate in a qualified CODA."

In a recent conference, a comment was made by the IRS that there was no guidance anywhere that would provide an equivalent number of hours associated with a period of service under the elapsed time method.  The attendees were quick to point to IRS's own 1.410(b)-6(f):

"(1) In general. An employee may be treated as an excludable employee for a plan year with respect to a particular plan if -

(v) The employee terminates employment during the plan year with no more than 500 hours of service, and the employee is not an employee as of the last day of the plan year (for purposes of this paragraph (f)(1)(v), a plan that uses the elapsed time method of determining years of service may use either 91 consecutive calendar days or 3 consecutive calendar months instead of 500 hours of service, provided it uses the same convention for all employees during a plan year)"

It will be interesting to see if this equivalency makes its way into final LTPT regulations.

I recently watched a webinar in which the speaker (Stephen Forbes) indicated that plans using elapsed time will be required to have LTPT eligibility requirements in the document.  Thoughts?

Let em put it in there if they want it but I  am not even thinking about LTPT on a plan with elapsed time.  That's a bridge too far.