The Act requires that starting in 2024, 401(k) plans permit LTPTs the opportunity to elect to make salary deferrals to a 401(k) plan.
So, why talk about it now if not effective until 2024? The definition of an LTPT employee is as follows:
- An employee who has completed three consecutive 12-month periods with at least 500 hours of service during each of those periods, and
- Who has reached the age of 21 by the end of the three-year period.
Since eligibility will be determined based upon hours worked in 2021, 2022 and 2023, plan sponsors and service providers must accurately track and report hours for LTPT employees. LTPT employees who meet these requirements must be allowed to contribute salary deferrals to the plan. However, they may be excluded from employer contributions and nondiscrimination testing. Employees covered by a collective bargaining agreement are not covered by the LTPT rules.
The law pertaining to LTPT employees may create dual eligibility requirements under the plan, assuming that the plan’s existing eligibility requirements are not as favorable as those required for LTPT employees. Plan sponsors and their service providers must monitor both the existing service requirement and the eligibility requirements applicable to LTPT employees.
LTPT employees may be excluded from employer matching and profit-sharing contributions, as well as safe harbor contributions under a safe harbor 401(k) plan. However, if an LTPT employee satisfies the general minimum age and service requirements by completing at least 1,000 hours of service, they become eligible to participate in employer contributions.
In retirement plans, employees, LTPT or otherwise, are always 100% vested in their salary deferral accounts. So, the subject of vesting only applies if an employer voluntarily elects to include LTPT employees in their company contributions that are subject to a vesting schedule. LTPT years of service for vesting purposes must include each 12-month period during which the employee has 500 hours of service or more for all years, including 12-month periods before January 1, 2021.
The main objective of the LTPT rules was to expand retirement coverage to a greater number of working Americans. However, the rules can have significant effects on plans designed under prior law. The possible entry of previously excluded employees and the maintenance of dual eligibility requirements can put an extra burden on plan sponsors and service providers. Considering this new requirement, reviewing the plan’s design is an important “to-do” for 2022.
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