Employers utilizing class-based criteria to exclude employees from retirement plan participation face new issues and considerations following the adoption of the long-term part-time employee (LTPTE) rules in SECURE 1.0 and SECURE 2.0. Employers who have not done so already may want to evaluate their plan's eligibility rules to determine whether any updates or clarifications may be desirable.
Background
The Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0) and the SECURE 2.0 Act of 2022 (SECURE 2.0) together generally require 401(k) and 403(b) plans to extend participation in the plan for purposes of making elective deferrals to employees who complete 500 or more hours of service in each of two consecutive 12-month periods (LTPTEs).
SECURE 1.0 first established the LTPTE rules and applied them to employees who completed 500 or more hours of service in each of three consecutive 12-month periods of service. SECURE 2.0 reduced the service requirement to two consecutive 12-month periods of service and made other changes. Notably, it extended the rules to 403(b) plans and included parallel eligibility rules in the Employee Retirement Income Security Act of 1974 (ERISA). Before SECURE 2.0, the LTPTE rules were limited to the Internal Revenue Code.
On November 24, 2023, the Internal Revenue Service (IRS) proposed regulations on the required coverage for LTPTEs, providing necessary guidance and helpful clarifications for compliance with the Secure Acts’ LTPTE rules. For example, the proposed regulations address the extent to which an employer can impose a participation condition on employees who meet the definition of an LTPTE. In turn, the regulations offer employers some clarity on which classes of employees can permissibly be excluded from plan participation.
For more details regarding the SECURE 1.0 and SECURE 2.0 requirements, see our LawFlashes from January 18, 2023 (on SECURE 2.0), October 5, 2020 (on Notice 2020-68 (guidance under SECURE 1.0)), and December 23, 2019 (SECURE 1.0). For a more in-depth discussion of the IRS’s proposed regulations on LTPTEs, see our February 2, 2024 LawFlash.
Classes of LTPTEs That Can Be Excluded from Plan Participation
In describing how to apply the LTPTE rules, the proposed regulations specifically recognize that a plan may exclude employees on the basis of a job classification that is not based on age or service. However, the proposed regulations caution employers about excluding employees on the basis of a job classification that may be a proxy for imposing an impermissible age or service requirement.
For example, an employer that has two manufacturing plants, Plant A and Plant B, may be able to permissibly cover only those employees employed at Plant A and exclude all employees who are employed at Plant B. However, if there are disguised service conditions (for example, an employee must be a full-time employee to work at Plant A or only part-time employees are hired at Plant B), such an exclusion may be a proxy for imposing an impermissible age or service requirement.
Even before the LTPTE rules, the IRS expressed skepticism of job classification exclusions that may impose impermissible service conditions. Now, with the LTPTE rules and increased emphasis on expanding retirement plan eligibility, these types of exclusions are likely to be under heightened scrutiny.
Moreover, in light of the January 1, 2025 effective date of the SECURE 2.0 LTPTE rules, for the first time, employees—and the US Department of Labor—will have the opportunity to enforce the LTPTE rules through ERISA. Given this background, employers may want to consider taking a fresh look at any job classification exclusions in their retirement plan eligibility rules—such as exclusions for “temporary” or “project” employees, or for interns—to confirm the exclusions continue to be permissible and do not result in any unintended consequences.
If you have questions about the information in this post, please contact the authors or your usual Morgan Lewis contacts.