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Long-term part-time employees - I'm confused.

Long-term part-time employees - I'm confused.

| January 28, 2024

I must admit to some confusion as I read the latest in the SECURE 2.0 act about long-term part-time employees and their participation in a 401k plan. I do understand and advocate for all employees being able to retire with dignity. Yet this latest approach makes me scratch my head a little.

In general, a retirement plan may exclude employees from a 401k by having eligibility requirements. For example, an employee may be required to work 1,000 hours in a 12-month period and be at least 21-years old in order to join the plan. The question though being addressed by SECURE 2.0 is one of long-term part-time employees. Those employees generally will never work the required number of hours in a 12 month period and SECURE 2.0 wants to rectify that.

Long-term part-time (LTPT) employees who worked at least 500 hours in each of the past three years (for plan years prior to January 1, 2025) are eligible to contribute to an employer sponsored retirement plan. For plan years beginning after December 31, 2024, long-term part-time employees who worked at least 500 hours in each of the past two years are eligible. My immediate concern was one of non-discrimination testing.

In particular, I was thinking about a restaurant client. Some of the servers might meet the 500 hours per year (roughly 1/4th of full-time employment) and are working in the restaurant as a supplement to a different full-time job where they already contribute to a 401k. The servers might elect not to contribute to a 401k because they are covered by the full-time job's 401k plan as well as the fact that their tips may be paid out in cash at the end of every shift. Their actual W-2 wages then would be quite low each pay period. Indeed, some LTPT employees might not want the offered 401k plan.

By not contributing though to the 401k, the servers would possibly impact the annual non-discrimination testing for the 401k plan. The testing looks at how much money was contributed to the 401k by non-highly compensated employees versus highly compensated employees. In general, if the average contribution rate for the highly compensated is higher than non-highly's contribution rate by 2% then the plan could fail non-discrimination testing. This could result in the highly compensated employees being forced to contribute less to the 401k (ie, via contribution refunds) or the company having to contribute to the non-highly compensated employees' 401k accounts.

In an attempt to provide everyone with a possible dignified retirement, SECURE 2.0 might have the opposite effect. LTPT employees might be asked to participate in a 401k plan that they do not want and the highly compensated employees who are trying to save for retirement might find themselves hampered.

An IRS public hearing on this topic is scheduled for March 15, 2024. It should be interesting to see how this unfolds.