SECURE Act - Part-time employees and vesting

If a 401(k) plan has no service requirement and does not exclude part time employees, will the vesting service criteria change to 500 hours for those employees that work more than 500 but less than 1000 hours for the plan year once the SECURE Act provision goes into effect in 2024?

why would it? the secure act just allowed for 401(k) entry for "long time" part time employees, it didn't say anything about changing the definition of a year of service for vesting

It is my understanding that if part-time employees do share in employer contributions, they will receive vesting credit for each year they worked 500 hours or more, rather than the 1,000 hours for full-time employees.

You are correct, I was not remembering correctly. It appears you can continue to exclude them from employer contributions but if they are included you have to credit a year of service for 500 hours instead of 1000 hours.

So, for the part-time employees that have participated in this plan for years but have not worked 1000 hours for vesting service will now get credit for anything over 500 hours?  Do the hours for vesting service begin in 2021 but not credited until 2024?  

IRS Notice 2020-68 includes guidance about the tax-qualification condition that a § 401(k) plan (but not any § 403(b) or § 457(b) plan) permit an employee to make elective deferrals if the employee has at least 500 hours of service a year in at least three consecutive years and has met the plan’s age requirement (for example, 21) by the end of the three-consecutive-year period.

The guidance includes vesting questions mentioned in this thread.

https://benefitslink.com/src/irs/n-20-68.pdf See pages 9-12.

Thank you to BenefitsLink for always posting these sources so quickly.

Sorry about coming to this thread late, but I have a question on this issue of vesting for LTPT ees.

Part C of n-20-68 states, "Under § 401(k)(15)(B)(iv), the special vesting rules of § 401(k)(15)(B)(iii) continue to apply to a
long-term, part-time employee even if the long-term, part-time employee subsequently completes a 12-month period during which the employee completes at least 1,000
hours of service".

So let's say my plan has a "One Year" wait for eligibility (1000 hours in a 12 month computation period).  The plan also requires 1000 hours of service for a vesting year.

Employee A is hired on 1/1/2023 and earns 1000 hours of service, and enters the plan on 1/1/2024.  Never considered to be a LTPT.

Employee B, is hired on 1/1/2021 and earns 500 hours in 2021, 22, and 23, and enters the plan on 1/1/2024 under the SECURE Act rules (and I'm  assuming also has 3 years of vesting service).

Plan does not provide match for LTPT eligibles.

During 2024 Employee B earns 1000 hours of service and effective 1/1/2025 is now a "real" participant, and starts receiving match.

Based on the quote from n-20-68, does Employee B continue to earn vesting service after 12/31/2024 with each year of 500 hours, while Employee A who was never an LTPT is required to earn 1000 hours?

Or am I misapplying the quote?

Thanks very much.

I came to piggy-back on Gilmore's comment here - It seems like poor logic for employee A to need 1000 hours every year and employee B might only need 500.

Geez, a plan sponsor might want to change the initial eligibility down to the 500 level so that NOBODY ever gets to be deemed a LTPT excluded from the plan.  (So that they can still use a 1000 hour vesting rule).  That's better than making all employees work 1000 hours before they can then later be shifted into a PT position later.

(As always, come up with the worst-case scenario and reverse engineer your law accordingly.)

26 minutes ago, Bri said:

I came to piggy-back on Gilmore's comment here - It seems like poor logic for employee A to need 1000 hours every year and employee B might only need 500.

Geez, a plan sponsor might want to change the initial eligibility down to the 500 level so that NOBODY ever gets to be deemed a LTPT excluded from the plan.  (So that they can still use a 1000 hour vesting rule).  That's better than making all employees work 1000 hours before they can then later be shifted into a PT position later.

(As always, come up with the worst-case scenario and reverse engineer your law accordingly.)

This is what comment periods are for...

Also, having to include them in the participant count for audit purposes is a bigger issue than vesting in my opinion.

Although the Notice is not a proposed rule, the Notice's part III expressly invites comments.

Some practitioners have suggested:

If an employer anticipates a meaningful number of employees will become eligible because of § 401(k)(2)(D)(ii), one might—to facilitate efficient coverage and nondiscrimination testing (including with the relief § 401(k)(15)(B)(i)(II) permits), or for other plan-administration reasons—organize two distinct plans:

a plan for those who meet eligibility conditions without any to meet § 401(k)(2)(D)(ii), and

another plan for those who are eligible only by meeting eligibility conditions provided to meet § 401(k)(2)(D)(ii).

One would design and administer the plans to meet required aggregations and disaggregations, and to rely on only permitted aggregations and disaggregations.

Further, each plan might bear its proper share of plan-administration expenses.

What do BenefitsLink mavens think about that suggestion?

I agree with RBG that the participant count issue is a big deal.  Not sure which is more complicated, dealing with multiple eligibility and vesting rules in one plan, or trying to manage two plans.  Either way there should be some balance between covering more employees and making the plan so complicated that the employer just says forget it and doesn't cover anyone.

Gilmore's observations involve policy points for Congress to consider.

But until they do, do BenefitsLink mavens think a two-plans solution is less expensive than an independent qualified public accountant's audit?

2 hours ago, Peter Gulia said:

...do BenefitsLink mavens think a two-plans solution is less expensive than an independent qualified public accountant's audit?

Two plans will almost certainly be cheaper.  If the audit is the cheaper alternative, it is probably not worth whatever the price is.

18 hours ago, Gilmore said:

I agree with RBG that the participant count issue is a big deal.  Not sure which is more complicated, dealing with multiple eligibility and vesting rules in one plan, or trying to manage two plans.  Either way there should be some balance between covering more employees and making the plan so complicated that the employer just says forget it and doesn't cover anyone.

Im hopeful the participant count issue will be "fixed" prior to implementation.  Since we are able to exclude them from testing and employer contributions, it would make sense to exclude for participant count OR only include LTPT participants with an account balance.  

The Treasury department, acting alone, lacks power to change the Labor department’s rule.

The turning point about 100 participants is in ERISA § 104(a)(2)(A):  “With respect to annual reports required to be filed with the Secretary under this part, he may by regulation prescribe simplified annual reports for any pension plan which covers less than 100 participants.”

ERISA § 3(7) defines a “participant” to include someone “who is or may become eligible to receive a benefit[.]”

The U.S. Supreme Court held this includes an employee with “a colorable claim that” she will “in the future” fulfill eligibility requirements.  Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 10 Empl. Benefits Cas. (BL) 1873, 1881 (Feb. 21, 1989).  Justice Scalia’s concurring opinion would include “those who (by reason of current or former employment) have some potential to receive the vesting of benefits in the future[.]”

In Firestone, the Court interpreted “participant” to discern who has a right to information under ERISA § 104(b)(4).  That’s in the same part 1 that commands a Form 5500 annual report.  And ERISA § 104(b)(4) commands a plan’s administrator to furnish an annual report on a participant’s request.

With this background, I doubt an agency could permissibly interpret ERISA to not regard as a participant someone who already met a plan’s age and service conditions designed to meet Internal Revenue Code § 401(k)(2)(D)(ii).

There might be room to interpret the verb “covers”.

But whatever agency interpretation one might imagine requires (at least) the Labor department’s act.

Don’t we guess that 2024 will arrive first?

32 minutes ago, Peter Gulia said:

But whatever agency interpretation one might imagine requires (at least) the Labor department’s act.

Agreed