August 22, 2024

Retirement Plan Changes for Part-Time Employees

The SECURE 2.0 Act of 2022 has introduced important changes to retirement plans, particularly for long-term part-time (LTPT) employees. These changes will impact how companies manage retirement benefits, making it essential for plan sponsors to understand and implement the new requirements. With the 2025 deadline approaching, plan sponsors must take action now to ensure compliance and optimize their retirement plans. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

Background and Key Updates 

Historically, employer-sponsored retirement plans have played an essential role in helping American workers save for their futures. However, a significant portion of the workforce—namely, part-time employees, which totaled nearly 25.5 million people in 2021, according to the Bureau of Labor Statistics—have not been able to claim these benefits. Under previous regulations, employees who worked fewer than 1,000 hours in a plan year were typically excluded from participating in employer-sponsored retirement plans. This exclusion disproportionately affected groups such as parents, caregivers, students, and those balancing multiple part-time jobs, many of whom need flexible work arrangements. 

Recognizing this gap, Congress took a significant step towards inclusivity with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. A key provision required employers to offer 401(k) plans to extend eligibility to long-term part-time (LTPT) employees. Specifically, the Act mandated that employees who worked at least 500 hours per year for three consecutive years must be allowed to participate in the employer’s 401(k) plan.

The SECURE Act was just the start of these reforms. In 2022, Congress passed the SECURE 2.0 Act, which expanded the original legislation’s provisions. One of the fundamental changes is the reduction in the service period required for LTPT employees. Starting with the 2025 plan year, LTPT employees will be eligible to participate in the employer’s retirement plan after two consecutive years of working at least 500 hours.  

The SECURE 2.0 Act also expanded the LTPT provisions to include 403(b) plans subject to the Employee Retirement Income Security Act (ERISA). This expansion means employees of public schools, certain non-profits, and other organizations offering 403(b) plans can also benefit. However, it’s important to note that collectively bargained employees and non-resident aliens with no U.S. source income are excluded.

Compliance Requirements for Plan Sponsors

Plan sponsors must take several key steps to comply with the SECURE 2.0 Act and keep your retirement plan on track. These actions include immediate operational changes as well as long-term planning, including:

• Review and Update Plan Documents: As soon as possible, revise all plan documents to reflect the new eligibility rules. Early preparation is crucial to avoid last-minute issues and ensure that all eligible employees are included.
• Track Employee Hours: Implement accurate tracking systems for employee hours, focusing particularly on those from 2021 onwards, to identify LTPT employees who meet the new eligibility criteria.
• Communicate Changes: Clearly inform eligible employees and stakeholders about the new eligibility rules, ensuring that everyone understands the implications for plan participation. .
• Annual Compliance Testing: Work with plan administrators to conduct required nondiscrimination tests. These tests ensure that the retirement plan does not favor highly compensated employees over other workers. As LTPT employees are included, compliance checks help to keep the plan in good standing.
• Coordinate with TPAs and Advisors: Collaborate with third-party administrators (TPAs) and financial advisors to manage the increased complexity of compliance requirements. Ensure that service agreements are updated to cover any additional administrative tasks.
• Leverage Technology: Consider implementing technology solutions or outsourcing tasks to manage the increased administrative workload efficiently while maintaining compliance with the SECURE 2.0 Act.
• Evaluate Administrative Costs: Assess how the new tracking and record-keeping requirements might impact administrative costs. Strategic planning will be necessary to balance these costs with the benefits of increased inclusivity.
• Prepare for Audits: Maintain comprehensive documentation and compliance procedures to be prepared for potential audits by the IRS or Department of Labor (DOL). Regularly review plan operations and stay informed about any additional guidance from regulatory bodies.

Timeline

• Operational Compliance (2025): By 2025, plan sponsors must begin following the new rules. This means eligible LTPT employees must be allowed to participate in retirement plans based on the new eligibility criteria (two consecutive years of working at least 500 hours). Plan sponsors must also start tracking hours, updating vesting schedules, and ensuring compliance with nondiscrimination testing under the new rules.
• Plan Document Amendments (Deadline by 2026): Sponsors must operate according to the new rules starting in 2025, but there’s a grace period until 2026 to formally amend retirement plan documents. This gives sponsors additional time to work with advisors, plan administrators, and other stakeholders to ensure that the formal documentation accurately reflects the operational changes that have already been implemented.

The SECURE 2.0 Act has significantly expanded retirement plan inclusivity, particularly for long-term part-time employees. Plan sponsors must be proactive to ensure a smooth transition as these changes take effect. By understanding the new requirements, amending plans accordingly, and strategically planning for the future, sponsors can ensure their retirement plans remain compliant and beneficial for all employees.

Contact Us 

As we look toward 2025, plan sponsors must take the necessary steps to prepare, ensuring the retirement plans are compliant and effective. If you have questions about the information outlined above or need assistance with your next benefit plan audit, Wilson Lewis can help. For additional information, call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.