Long-term, Part-time for plan that excludes PT

I know much has likely been said about this already.  We have a new client plan that uses the part-time exclusion (those scheduled to work <1000 hours).  But are those who worked 500+ for 2 consecutive years still eligible to defer? Or does the PT exclusion trump the LTPT rules?

Thank you, Tom

I'm assuming you are talking about a 401(k) plan for a regular for-profit business. If it something else, special rules may apply. 

You should do a search on this board as well a general internet searches for "disguised service conditions, 401(k) class exclusion" or something similar. Also check the plan's legal document, as often the underlying document makes it clear that while different eligibility requirements can apply to part-time workers, they usually can't be structured in a way to hold them out of the plan completely. So might be your first issue. 

The second question is does a valid(yours probably isn't) class exclusion override the LTPT rules? 
I'll leave others to comment on that question, but my hunch is no they don't. If a doc says everyone at location A is excluded, I believe that exclusion applies to any possible LTPT workers from location A as well, but I'm sure others can provide better, or more certain insight into that question. 

Just another I believe you are right about that. you jogged my memory.

LTPT Rules "trump" the Exclusion.  We have been trying to discourage the use of the 20 hour (or 1000 hour) exclusions because the recordkeeping etc on this is a challenge.  The Sponsor will have to track the hours for application of the LTPT rules back for the time period required (2 years for 403(b)) and permit any employee who qualifies to defer. The LTPT rule itself only requires application for deferrals, but your document should also request a choice regarding any employer contributions.  In other words, application of the employer contribution is not required by the LTPT rules.

The Treasury department’s proposed interpretation [https://www.regulations.gov/document/IRS-2023-0058-0001] of the statutes includes this:

“Subject to paragraph (c)(3)(ii) of this section, the rules of this section do not preclude a plan from establishing an eligibility condition that must be satisfied in order for an employee to participate in the arrangement (for example, requiring as a condition of participation that an employee be employed within a specified job classification), provided that the condition is not a proxy for imposing an age or service requirement that requires an employee to complete a period of service with the employer or employers maintaining the plan that extends beyond the close of the earlier of the periods described in section 401(k)(2)(D)(i) and (ii).”

If a plan’s administrator, in interpreting documents that govern a plan (or in interpreting a presumption about a to-be-written-later plan amendment that would have retroactive effect), follows the Treasury’s proposed interpretation of the statutes, there still might be legal, textual, and factual ambiguities about whether a job classification or other eligibility condition is or “is not a proxy for imposing an age or service requirement” contrary to ERISA § 202(c) or Internal Revenue Code § 401(k)(2)(D)(i)-(ii).

That an employee becomes eligible to elect for or against elective deferrals does not by itself mean the employee is eligible for another kind of contributions.

As Patricia Neal Jensen observes, a plan might specify eligibility conditions distinctly for each kind of contributions.