The American Retirement Association (ARA) is calling on the IRS to revise several provisions contained in the proposed long-term, part-time employee (LTPTE) rules for 401(k) plans.
Chief among the ARA’s recommendations is for the IRS to revise the proposed rule regarding vesting service to conform with congressional intent and to provide relief to mitigate the material cost impact to plan sponsors.
Published in the Federal Register on Nov. 27, 2023, the proposed guidance addresses Section 112 of the SECURE Act of 2019 and Section 125 of the SECURE 2.0 Act of 2022 regarding LTPTEs.
LTPTE Vesting
Among other things, the LTPTE rules stipulate that 401(k) plans cannot impose a service condition longer than the applicable 410(a)(1) period (generally one year of service) or three consecutive 12-month periods during each of which the employee has at least 500 hours of service (two consecutive periods beginning with the first plan year beginning on or after Jan. 1, 2025).
Under the proposed rule, individuals participating solely as LTPTEs and any employee who ever entered the plan as a LTPTE (former LTPTEs) are required to be credited with a year of vesting service for each 12-month period in which they are credited with at least 500 hours of service.
“This is not consistent with the statute or Congressional intent and creates a material negative impact on plan sponsors,” write ARA Executive Director and CEO Brian Graff, and ARA Director of Regulatory Policy Kelsey Mayo.
The pair contend that the statute related to special vesting for LTPTEs clearly applies only to employees who are participating solely based on LTPTE rules. According to the letter, IRC Section 401(k)(15)(B)(iii) provides that “for purposes of determining whether an employee [who is eligible to participate in the arrangement solely by reason of [the LTPTE rules]] (i) has a nonforfeitable right to employer contributions (other than [elective deferrals]) under the plan, each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service.”
Further, the ARA contends that the position in the proposed rule that the 500-hour vesting rule applies to all contributions, including those made after the employee ceases to be a LTPTE, is contrary to the congressional intent that it apply only to contributions made while someone was a LTPTE. In fact, the House Ways and Means Committee Report specifically provides:
The provision does not require a long-term part-time employee to be otherwise eligible to participate in the plan. Thus, the plan can continue to treat a long-term part-time employee as ineligible under the plan for employer nonelective and matching contributions based on not having completed a year of service. However, for a plan that does provide employer contributions for long-term part time employees, the provision requires a plan to credit, for each year in which such an employee worked at least 500 hours, a year of service for purposes of vesting in any employer contributions.
The ARA believes the LTPTE vesting provisions can be interpreted consistently with this clear congressional intent, the letter further explains. Specifically, it notes that years of vesting service should be credited based on a LTPTE’s completion of 500 hours of service per year only with respect to contributions accrued while a participant is a LTPTE. With respect to contributions accrued after the employee ceases to be a LTPTE, nothing in the statute requires application of the 500-hour rule. Therefore, the plan should be permitted to credit vesting service under the normally applicable rules of IRC Section 411 when the employee is not a LTPTE, the letter suggests.
“The clear Congressional intent was to ensure that if employees were given employer contributions as LTPTEs, then they would have an opportunity to vest in those contributions in light of their reduced work schedules,” Graff and Mayo further write. “There was no intent to provide more favorable vesting in all plan contribution sources to LTPTEs than similarly situated employees based on when they earn a year of service. The Proposed Rule creates a seemingly absurd result whereby LTPTEs are treated more favorably than similarly situated employees.”
Consequently, the ARA recommends that the IRS modify the proposed rule to provide that years of vesting service are accrued based on the completion of 500 hours of service during the year only with respect to contributions accrued while an employee is a LTPTE.
Further, the ARA contends that the timing of the proposed rule essentially eliminated the plan sponsor’s ability to assess its demographics and adjust the plan design to avoid these costs. As explained in the organization’s Nov. 29, 2023 letter, the proposed rule created an irreversible vesting rule with material cost implications and applied that to some plans retroactively and to others with only 25 working days to respond.
“Plan Sponsors must be given adequate time to understand the Proposed Rule, design their plans in response to the regulation, and adjust administrative programming. It is unconscionable to apply the vesting rule in the Proposed Rule to plan sponsors effective January 1, 2024, when it creates irreversible (and, in some cases essentially retroactive) impacts and fails to give plan sponsors sufficient time to respond by designing their plans to simplify plan administration,” the ARA states.
Accordingly, the organization urges the IRS to issue administrative relief that will be applicable for all of 2024 and, if the vesting rule is not modified as recommended, then the vesting rules of the proposed rule will apply only to individuals who are participating as LTPTEs on or after Jan. 1, 2025 (and any good faith interpretation, including that vesting service using the 500-hour rule is credited only if the LTPTE received employer contributions, applies for periods prior to 2025).
Additional Recommendations
On top of suggesting that LTPTE vesting should apply only contributions accrued as a LTPTE, additional recommendations offered by the ARA include that the IRS should:
• Clarify that a plan using the elapsed time method for purposes of eligibility will be deemed to satisfy the LTPTE requirements;
• Revoke or make obsolete the holding for situation 4 of Rev. Rul. 2004-13 (related to the top-heavy exemption for safe harbor plans);
• Provide administrative relief so employers are not treated as violating applicable requirements merely because employees were not treated as LTPTEs before 2024;
• Clarify that LTPTEs may be permissively disaggregated regardless of actual eligibility to participate in the plan;
• Provide favorable safe harbor correction methods for eligibility errors that occur prior to Dec. 31, 2025;
• Ensure that employers may satisfy the LTPTE rules on an employer-wide basis;
• Clarify that all discretionary changes to eligibility will be treated as made pursuant to SECURE 2.0 and such delayed adoption does not jeopardize a plan’s safe harbor status; and
• Provide Section 411(d)(6) relief for the revocation of good-faith amendments already adopted to comply with the SECURE Act.
