In this series of articles, we explore the implications of the long-term, part-time employee rules under the SECURE Act and SECURE 2.0 and the impact those rules have on employers and their workforces.
Following the SECURE Act and the SECURE 2.0 Act, employers must now offer employees who work at least 500 hours within three (reduced to two beginning January 1, 2025) consecutive 12-month periods an opportunity to make elective deferrals to their 401(k) plans and, beginning in 2025, their 403(b) plans. This new long-term, part-time employee rule modifies rules that previously allowed employers to exclude employees from plan participation until the employees completed 1,000 hours of service in a single 12-month measurement period.
In doing so, the new rule has generated questions about whether all employers will now be required to track the actual hours all employees work to ensure compliance with this rule. The recently proposed regulations released by the Internal Revenue Service (IRS) confirm, in what should be a relief to many employers, that the answer is no. Employers do not need to change how they count periods of service toward plan eligibility. However, employers should revisit how such service is currently counted under their plans and consider the impact that may have on if and how the long-term, part-time employee rules apply.
METHODS FOR TRACKING SERVICE
At a high level, plans have historically used one of two methods for calculating eligibility service:
The hours-count method. In its simplest form, under this method, an employer counts the actual hours an employee works during a given period, usually with the help of the employer’s human resources information system provider or plan recordkeeper. Alternatively, to avoid the need to count actual hours worked, employers may adopt a modified version of hours counting based on daily, weekly, semimonthly or monthly equivalencies. In doing so, employers credit employees with a certain number of hours—10 hours per day, 45 hours per week, 95 hours per semimonthly period or 190 hours per month—for any time they work during the designated measurement period selected by the employer, regardless of the time worked during that period.
For example, let’s assume an employer uses actual hours worked to track service. Let’s also assume that an employee’s timesheet indicates that the employee worked four hours per day, five days per week during the first month of the year. Because the employer is using the actual hours count to track service, the employee would be credited with 80 hours of service for the month. In contrast, let’s assume the same facts, but the employer uses a monthly equivalency under which the employer is required to credit an employee with 190 hours of service per month, regardless of how many hours of work the employee performed. In that case, the same employee would be credited with a full 190 hours of service for the first month of the year, rather than only 80 hours.
The result—i.e., the fact that the employee is credited with more service for the same period of work using the monthly equivalency—would be similar under other equivalency methods. This is because equivalencies are designed to ensure that, where employers do not track actual hours worked, employees always receive the benefit of the doubt in how service is credited to them for purposes of satisfying minimum hours-based service requirements. As a result, by design, equivalences tend to overstate the hours worked by employees. In addition, because equivalencies are based on the anticipated time worked by a full-time employee—plus that benefit-of-the-doubt bump—the difference between the time credited under the actual-hours count and equivalency methods is further magnified for employees who are working less than full-time.
The elapsed-time method. As the name suggests, under this method, an employer counts service based on time that has elapsed—in days, weeks, months and years—between an employee’s date of hire or rehire through the employee’s termination date. Consequently, the actual hours worked by an employee during that period do not matter.
For example, if an employee is hired on May 1, 2024, and is terminated two years later, on April 30, 2026, the employee will be credited two years of service. This is true regardless of whether the employee works eight hours per day, five days per week during that period or only works a vastly reduced part-time schedule (e.g., two hours per day, three days per week).
IMPACT OF NEW RULES ON METHODS FOR TRACKING SERVICE
The new long-term, part-time employee rules under the SECURE Act and the SECURE 2.0 Act do not change these rules. Employers can still use either the hours-count or elapsed-time method to track eligibility service under their plans.
However, the recently proposed regulations issued by the IRS make clear that the new long-term, part-time employee rules do not apply to plans that use elapsed time to track eligibility service. Instead, the rules only apply to plans that use the hours-count method. Fortunately, most employers whose plans use the hours-count method reviewed their eligibility-tracking processes some time ago in anticipation of the initial effective date of the new rule in 2024. But with that new rule now effective, it is essential that employers review those processes as soon as possible to determine if further changes are needed. Some employers may also want to continue exploring design changes that would help reduce the administrative burden associated with complying with the new rules.
For any questions regarding the proposed regulations or SECURE 2.0, please contact your regular McDermott lawyer or one of the authors.