• As of 2024, long-term, part-time (LTPT) employees must be allowed to make salary deferrals into their employer’s 401(k) plans, requiring companies to make sure they’re compliant with SECURE Act regulations.

• Many 401(k) plan service providers are unprepared for the implementation of LTPT employee rules, potentially exposing employees to costly corrective actions and compliance risks.

• Employers should not assume HR and plan providers will handle this automatically; noncompliance could lead to financial penalties, increased administrative costs, and mandatory corrections.

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The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act of 2019) and the SECURE 2.0 Act of 2022 (collectively, SECURE) enacted a new mandate that, starting in 2024, long-term, part-time (LTPT) employees must be allowed to make salary deferrals into their employer’s 401(k) plan.  

The systems used by many 401(k) plan service providers are not ready for the required implementation starting with the first plan year beginning on or after January 1, 2024 (i.e., January 1, 2024, for calendar year plans).  

Some executives may view this change as an issue that does not require their attention and that will be handled by their human resources (HR) staff and the 401(k) plan service providers. But not complying with the rules might be costly for the employer if corrective contributions for LTPT employees who were not allowed to participate are required, along with ancillary costs.  

New Mandate 

For decades, tax-qualified retirement plans could exclude employees who work fewer than 1,000 hours of service per year, even if the employee worked for the employer for many years. Employees who worked over 1,000 hours generally could not be excluded from the plan (with certain non-hours-based exceptions). To improve access to workplace retirement savings plans, the 2019 SECURE Act required 401(k) plans to allow employees who have worked at least 500 hours in three consecutive years (based on employment with the employer from January 1, 2021, onward) to make elective deferrals to the plan. Thus, if an employee had 500 hours of service in 2021, 2022, and 2023 (but never had 1,000 hours of service per year), that employee must be allowed to make salary deferrals into the employer’s 401(k) plans starting with the first plan year beginning on or after January 1, 2024. For plan years beginning in 2025 and later, SECURE 2.0 of 2022 reduces the three-year measurement period to two years.  

On November 27, 2023, the IRS issued proposed regulations that employers can rely on to apply the LTPT employee rules until the final rules are issued.  

An Example of How the Rules Work 

Let’s assume a calendar year 401(k) plan has a requirement that employees must be age 21 and complete 1,000 of service before being eligible for plan participation that includes making elective deferrals and receiving company matching contributions.  Starting in 2024, some employees who do not meet the 1,000-hour service requirement might be eligible to make salary deferrals. The employer is not required to make matching contributions or any other employer contributions for LTPT employees who make salary deferrals.  

Counting the hours worked to determine plan eligibility is not new and the rules are essentially the same for counting 1,000 hours and 500 hours.  Hours for new employees should be counted for 12 months following their date of hire, but the measurement period can be switched to the plan year for administrative ease. However, while the 1,000-hour requirement is a standalone measure for each year, the 500-hour count is relevant for two or three years, depending on the plan year under evaluation.  Therefore, for a calendar year plan beginning January 1, 2024, the hours are counted for 2021, 2022, and 2023.  Any employee whose count is 500 or more but less than 1,000 in each of those three years should be allowed to make elective deferrals into the calendar year plan as of January 1, 2024.   

As a further example, assume Susan was hired on June 1, 2021, by an employer that sponsors a calendar year 401(k) plan. On December 31, 2021, the first plan year end after Susan’s hire date, the employer switches her hours worked to be measured based on the plan year.  Year One for Susan runs from June 1, 2021, through May 31, 2022.  Year Two for Susan runs from January 1, 2022, through December 31, 2022, and Year Three for Susan runs from January 1, 2023, through December 31, 2023.  Susan worked 500 hours in Year One, 680 hours in Year Two, and 520 hours in Year Three.  Therefore, effective January 1, 2024, she should be allowed to make elective deferrals under the plan.  Note that the switch from counting hours based on Susan’s date of hire anniversary to using the plan year as her eligibility computation period causes the hours she worked from January 1, 2022, through May 31, 2022, to be double counted in both her first and second year.  

Even though vesting schedules have no relevance to Susan’s elective deferrals (since she is always 100% vested in her own contributions), she will receive a year of vesting credit for each year after 2021 that she works at least 500 hours (i.e., Susan has three years vesting credit if she became eligible for employer contributions in 2024). This would be significant if she subsequently becomes eligible to participate in the plan for a reason that is not solely on account of being an LTPT employee. Once an individual is eligible for the plan, they remain eligible and do not have to requalify to participate. 

For the 2025 plan year, the period from June 1, 2022, through May 31, 2022, will drop out of the determination. Additionally, the period from January 1, 2022, through December 31, 2022, will drop out of the determination because of the change made by SECURE 2.0 to look back only two years instead of three. Accordingly, Susan’s 2025 plan eligibility as an LTPT employee will be based on her hours worked during the 2023 and 2024 plan years. 

The future years’ determination is complicated, especially if the employee’s hours worked fluctuate above and below 1,000 hours.  

Why Should I be Concerned? 

While employers are not required to match the LTPT employee deferrals and LTPT employees are excluded from the annual tests that otherwise apply to all employees (e.g., coverage, nondiscrimination, and top-heavy requirements), there might be some increased cost to the plan sponsor for including LTPT employees in the 401(k) plan. Employers should consider the following potential increases in plan cost due to the new LTPT employee mandate.  

1. Increased Plan Audit Expense -The additional participants due to LTPT employee status must be counted when determining if the 401(k) plan must have an annual independent audit of the plan’s financials.  Starting with the 2023 plan year, 401(k) plans that have more than 100 participant accounts as of the first day of the 2023 plan year must have an annual independent audit. Before 2023, 401(k) plan participants who were eligible to make salary deferrals were counted as participants — even if they did not contribute anything — for purposes of counting the number of participants. The DOL changed the rules starting in 2023, among other things, to include only those with account balances as participants. Keep in mind that the number of participants can be decreased by taking advantage of rules that allow distributions of small account balances (accounts valued at less than $7,000 starting in 2024) to former participants.  

2. Increased Plan Administration Costs – The time spent internally and by plan service providers increases as the number of plan participants increases, particularly if recordkeeping for a new category of participants is necessary. The LTPT employee rules raise unique recordkeeping challenges necessitating new programing and new procedures to stay in compliance.  

3. Costly Corrective Actions – The employer must take steps to correct any instance of when an employee that is eligible to make elective deferrals was not notified of being eligible.  Increasing the number of eligible employees increases the possibility of someone being missed.  But the immediate concern is based on feedback that many administration systems are not ready for the implementation of the LTPT rules as early as January 1, 2024 (for calendar year plans).  Any delay in communicating the eligibility to LTPT employees that causes a delay of payroll deductions of elective deferrals beyond their eligibility date would be an operational failure that would need correction under the IRS’s Employee Plans Compliance Resolution System (EPCRS).  While corrective contributions to make up the employee’s missed contribution are not always required, notices would need to be provided to any participant that had a missed deferral period to advise them that their future retirement savings might need adjustment due to the delay in making elective deferrals.  

4. Decreased Forfeitures – LTPT employees earn vesting credit for each year after 2021 during which they work at least 500 hours but less than 1,000 hours. While the vested percentage has no impact on the years the employer does not make contributions on the employee’s behalf, vesting as an LTPT employee carries over to any years that the employee becomes eligible for employer contributions.   

5. Operational Compliance Before Plan Amendment Deadline – For a 401(k) plan to be “qualified” (that is, eligible for favorable tax treatment), it must comply with the statutory requirements in both form and in operation. SECURE provides that the written plan document is not required to be amended until the end of the 2025 plan year. However, the plan must operate in compliance with the applicable changes in the law for all plan years, starting with the effective date of the change. Since the LTPT rules took effect for plan years beginning on or after January 1, 2024, the 401(k) plan would need to be operated with those rules starting in 2024, even though a formal, written plan amendment is not required until the end of the 2025 plan year. Therefore, any decisions regarding compliance with the LTPT employee provisions should be documented and the proper procedures and controls put in place.   

While plan sponsors might rely on their 401(k) plan service providers to identify eligible LTPT employees, liability for noncompliance remains on the employer. The risk associated with not allowing LTPT employees to make elective deferrals to a 401(k) plan can be avoided if the plan lowers the 1,000-hour requirement to not more than 500 hours or determines eligibility on the elapsed time method instead of the counting hours method of determining eligibility to make salary deferrals under the plan.   

SECURE provides numerous exceptions from coverage, nondiscrimination, and top heaviness tests for employees who participate in the plan solely on account of the LTPT employee provisions. Any employee that satisfies the more generous plan document provisions will not qualify for the confusing rules that otherwise apply to LTPT employees. Still, avoiding LTPT employee status altogether might be cost effective.   

How MGO Can Help 

MGO is here to help you maneuver the complexities of the SECURE Act’s LTPT employee requirements—which can be challenging. Our team of professionals can assist with compliance strategies, plan amendments, and operational adjustments to make sure your 401(k) plan meets regulatory requirements while minimizing your risks and costs.

Whether you need guidance on eligibility tracking, recordkeeping updates, or strategic plan design, we can help you with solutions that keep you compliant and your retirement plan running smoothly. Contact us today to stay ahead of these challenges with confidence. 

Written by Joan Vines and Norma Sharara. Copyright © 2024 BDO USA, P.C. All rights reserved. www.bdo.com 

The post New Requirement to Cover Long-Term Part-Time Employees in 401(k) Plans Enters Into Effect appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Evaluate buy-outs and plan terminations to mitigate pension plan risks.

• Higher interest rates can reduce costs for cashing out or annuitizing pensions.

• Consider timing, costs, and regulatory requirements before terminating a pension plan.

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Approximately 46,500 defined benefit pension plans existed as of 2022, according to the Employee Benefits Security Administration. Each plan carries inherent risk because assets, liabilities, and funding costs to employers are dependent on market trends, economic conditions, and interest rates.  

“De-risking” a defined benefit pension plan is a common way for companies and pension plan administrators to mitigate such risk while balancing plan liabilities and assets. When determining whether to de-risk or terminate a pension plan, sponsors will want to consider the effect that significant rate changes could have on the timing and cost of payouts.   

While various de-risking strategies exist — including buy-in agreements and liability-driven investments — this insight will focus on approaches involving the termination of the plan and annuity buy-outs. We will look at why this may be a prime time to consider these pension stripping strategies because current economic conditions, such as higher interest rates, could offer a more cost-effective option for plan sponsors to mitigate financial risk. 

Interest Rates: Catalyst for De-risking? 

Pension plan sponsors are tasked with monitoring any economic conditions that might affect their ability to balance plan assets and liabilities. This includes interest rates, where fluctuations and trends can cause corresponding fluctuations in a pension plan’s liabilities, assets, and costs.  

Interest rates can have both positive and negative impacts on a pension plan. When rates drop, pension obligations may rise. Future pension plan payments may be discounted to today’s rates, which, in turn, changes the lump sum payment or annuitization for participants. But lower interest rates can increase the plan’s costs for de-risking. On the other hand, higher interest rates tend to decrease the costs associated with cashing out or annuitizing pensions.  

Navigating the ebb and flow of interest rates can be a constant challenge. While economic conditions cannot be predicted, rates over the past year or so have remained higher than anticipated by those in the pension plan industry. Even a slight increase or decrease can have a significant effect on a plan’s liabilities and costs, making plan termination or participant cash outs and annuitizations more favorable. Just as varying obligations affect plan termination costs, the plan’s asset valuation is equally important and is also subject to interest rates. 

Decision Time: Is Pension Plan Termination the Right Move?

Based on recent news, plan sponsors appear favorable to plan termination. In 2023, the transfer of pension plan assets to group annuity contracts topped $45 billion, with an uptick in other methods of de-risking. For example, a group annuity risk transfer product, such as a buy-out product, allows a sponsor to transfer all or a portion of its pension liability to an insurer. In doing so, a sponsor can remove the liability from its balance sheet and reduce the volatility of the pension plan’s funded status.  When considering whether to terminate a pension plan by offering to cash out or annuitize participants, strategy is key.  

Discussions about potentially terminating a pension plan should be done well in advance since there are a number of considerations to evaluate. It’s also important to recognize that a complete termination of a pension plan may take a year or more so shifting economic conditions could impact the resulting cost. 

The following actions may be taken when terminating a plan:

• Analyze the current pension plan, including liabilities, assets, and costs. 
• Consider current interest rates and the lump sum interest rates dictated in the plan document, as well as the potential for change. 
• Consider any administrative costs that might be incurred, including assistance from third-party administrators and ERISA counsel. 
• Determine the timing for the plan, while still monitoring market and regulatory environments.  
• Amend plan documents as necessary. 
• Request required approvals from the Pension Benefit Guaranty Corporation and the IRS.  
• Prepare and send appropriate notifications to participants, as required by law, once a de-risking strategy is determined. 
• Execute the planned reduction or termination. 

Planning is crucial. Generally, we encourage plan sponsors to develop de-risking strategies well before they might be implemented, and then monitor economic triggers before choosing to begin plan termination or cashing out/annuitizing participants. Reversing course is usually possible early in the termination process. 

Could De-Risking Be Part of Your Plan’s Future? 

The decision here depends greatly on the pension plan’s individual circumstances. And, yes, any action that changes a pension plan involves complicated financial strategies, as well as the need to comply with applicable laws and regulations. It’s important to consider all factors before deciding to terminate a pension plan by cashing out or annuitizing participants, including current economic conditions, upfront costs that might be incurred, and the company’s future business plans. 

Before stepping through any potential pension-related window of opportunity, talk to professionals whose understanding of the complexities stems from real life experience. 

How MGO Can Help 

MGO provides comprehensive solutions to help you navigate the complexities of managing your pension plan. Our team offers tailored strategies for de-risking, including plan terminations and annuity buy-outs, keeping your plan balanced and cost-effective. By closely monitoring economic conditions and interest rate trends, we help you make informed decisions that align with your financial goals. MGO guides you through every step of the process, from analyzing your current plan to executing a well-timed de-risking strategy, all while maintaining compliance with regulatory requirements.

The post Strategic Timing to De-Risk Your Pension Plan  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• As of January 1, 2025, new 401(k) and 403(b) plans must automatically enroll eligible employees with contributions escalating annually—and certain small businesses and older plans are exempt.  

• Employees who are 60 to 63 can contribute significantly more to their retirement plans, with increased limits based on inflation adjustments.  

• SECURE 2.0 reduces the service requirement for long-term, part-time employees to participate in 401(k) plans from three years to two, boosting retirement savings opportunities.  

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With the new year underway and a new administration in D.C. getting settled, change is inevitable. However, there are new employee benefit plan provisions taking effect in this year, driven by existing laws such as the Employee Retirement Income Security Act of 1974 (ERISA) and the Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0). Let’s dive in.  

Mandatory Automatic Enrollment for New Plans 

SECURE 2.0 established new requirements for new 401(k) and 403(b) plans adopted after December 29, 2022. As of January 1, 2025, employers must automatically enroll eligible employees into these plans with an initial deferral percentage that is between 3% and 10% of compensation. Automatic contributions escalate by at least 1% per year up to a deferral rate of at least 10% but not more than 15% (10% until January 1, 2025). Participants can opt out of automatic enrollment or automatic escalation at any time.  

The following may be exempt from the new requirements: 

• Plans in effect on or before December 29, 2022. 

• Organizations in existence for less than three years. 

• Businesses with fewer than 10 employees. 

• Church and governmental plans.

Catch-up Contribution Increases 

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) first introduced catch-up contribution provisions as a way to help older workers increase retirement savings. Under EGTRRA, plan sponsors could voluntarily amend their plans to allow participants aged 50 and older to contribute additional amounts to their 401(k), 403(b), and 457(b) plans. Prior to December 31, 2024, catch-up contributions to these plans were limited to $7,500, as indexed.  

For taxable years beginning after December 31, 2024, those contribution limits change. Participants aged 60 to 63 may make additional contributions of either (i) $11,250 or (ii) 150% of their 2024 contribution limit, as indexed for inflation after 2025. 

For SIMPLE IRA plans, before December 31, 2024, participants in SIMPLE IRA plans that allow catch-ups could contribute up to $3,500. In 2025, such contributions rely on the participant’s age (50 to 59, or age 64 or older on December 31, 2025) and the company’s number of employees. Depending on these factors, a participant’s contributions above regular deferrals can total between $3,850 and $5,250. 

Coverage of Long-Term Part-Time Employees 

The original SECURE Act required employers to include certain part-time employees in their 401(k) plans. To be eligible, the employee must have worked at least 500 hours per year for at least three consecutive years and must be at least 21 years old as of the end of that three-year period. The employee also would earn vesting credits for all years with at least 500 hours of service. 

SECURE 2.0 reduces the three-year period to two years for plan years beginning after December 31, 2024. However, service performed before January 1, 2021, is disregarded for both eligibility and vesting purposes.  

Although SECURE 2.0 extends this rule to apply to 403(b) plans that are subject to ERISA, the rule does not apply to union plans or defined benefit plans. 

Distributions for Certain Long-Term Care Premiums 

Plan participants may receive distributions of up to $2,500 per year to pay for quality long-term care insurance without triggering the 10% early withdrawal penalty that might otherwise apply. This optional change for plan sponsors becomes effective for distributions made after December 29, 2025.  

The Lost and Found Database 

Retrieval or management of retirement funds can be complicated when workers move from job to job. To help reunite participants and their missing retirement plans, SECURE 2.0 required the Employee Benefits Security Administration to provide a search tool or database of benefits by December 29, 2024. At this time, participation is voluntary, but some groups are concerned about the breadth of information initially requested by the Department of Labor to populate the database.  

Is Your Plan Ready for 2025? 

By staying informed and prepared, plan sponsors can navigate these changes effectively. You should proactively review and adjust all your plans accordingly to make sure you’re staying compliant with the new mandates.  

How MGO Can Help 

With 2025 underway and new employee benefit plan regulations taking effect, staying compliant and maximizing your plan efficiency is more important than ever. MGO’s Audit team can provide you with guidance to help you implement required changes, optimize contributions, and make sure your plan meets the regulatory standards. We’re here to assist with compliance reviews, plan amendments, and any strategic planning you need to support your organization’s success for the long-term. Contact us to learn how we can help you prepare for 2025.  

The post Planning for 2025: Employee Benefit Plan Changes Taking Effect  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Partial 401(k) plan terminations occur when 20% or more of employees are involuntarily terminated, requiring full vesting for affected employees to comply with legal requirements. This can create a financial burden on your company.
• To mitigate the financial impact, you can utilize forfeiture accounts to fund the full vesting requirements. This will reduce the immediate cash flow impact on the business, but vesting adjustments can be made regardless.
• To avoid any plan disqualification or IRS penalties, you should implement oversight policies, document all terminations, monitor workforce changes closely, and be familiar with plan rules and forfeiture account management.

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Employee turnover often triggers a wave of issues for your company and its human resources department. Even 401(k) retirement plans — one of the most sought-after employee benefits — can be impacted when a substantial number of your employees are involuntarily terminated. This can constitute a partial 401(k) plan termination, where full vesting of the affected employees must occur to satisfy legal and regulatory requirements. Yet, partial terminations are often easy to overlook.

How You Can Identify Partial 401(k) Terminations

One key element of your 401(k) management is understanding how workforce reductions can affect the plan itself. This is extremely important as the IRS can issue a complete disqualification of the plan when partial terminations go unnoticed or are mishandled.  

According to IRS regulations, a partial 401(k) termination may occur upon the involuntary termination of 20% or more of employees who are plan participants at the beginning of the year. Odds are, some of your employees will be fully vested while others may not meet the plan’s requirements for 100% vesting of employer contributions.

As an employer, you should ensure your HR department monitors fluctuations in employee headcounts, as well as be on the lookout for events that can trigger a large workforce reduction that could result in a partial 401(k) termination. However — and this is the confusing part — the 20% workforce reduction count is cumulative and can span more than one plan year. It can also be triggered by things other than layoffs and plant closings. These include:

• Business restructuring that decreases the size of the workforce.
• Amendments to the 401(k) plan where the number of eligible employee participants decreases.
• Employee turnover for positions that are not expected to be replaced. 

The IRS calculates the turnover rate using a specific formula: 𝑇R = 𝐴 / 𝑋 + 𝑌. 𝑇R means the turnover rate equals the number of participants who were terminated (A) divided by the number of participants at the end of the prior year plus any added during the plan year (X+Y). For example, if 20 employees were terminated at a company that had 80 participants, the turnover rate would be 25%.

If it appears that your company’s workforce has dropped or is expected to drop by 20% or more, you, HR professionals, and plan administrators should closely scrutinize 401(k) plan documents and the laws and regulations governing such retirement plans.

Workforce Reductions and the 401(k) Plan

How does the termination of employee participants affect your company’s 401(k) plan? Between the complexity of 401(k) plan regulations and vigorous IRS oversight, it is crucial to understand that significant employee turnover and other workforce-related events can impact your retirement plan operations and forfeiture accounts.

If it is determined that a partial 401(k) termination occurred, your company must fully vest the affected employees regardless of plan requirements. For example, plan documents might require an employee to work six years to become fully vested in the employer’s contributions to the 401(k) plan. A layoff occurs which includes employees with less than six years of service. You must vest these employees at 100%, in part because they were not given the opportunity to meet that six-year benchmark. The same is true for other events, such as business restructuring and plan amendments that affect employee eligibility.

The immediate vesting of a large number of departing employees could potentially and negatively impact your business. The plan’s forfeiture accounts may be available to fund the vesting of employees without a significant immediate impact on cash flow. However, any required adjustments to vesting must occur whether the forfeiture accounts will cover the cost or not.

It’s important to identify and plan for any event that could jeopardize your 401(k) plan. Failing to recognize a partial 401(k) plan termination is common, but you can take the steps needed to enhance your monitoring procedures and increase awareness.

Avoiding Partial Termination Missteps

The IRS can completely disqualify your 401(k) plan if your vesting is not handled properly after a partial termination. Here are some of the practices you can consider to mitigate any risk:

• Learn the rules. Rules and regulations surrounding partial terminations tend to be complex, so you should consider consulting with an employee benefit plan professional or ERISA attorney to understand the rules.
• Know your plan. Become familiar with plan document provisions related to partial plan terminations, vesting provisions, and the use of forfeiture accounts.
• Establish your oversight policies and procedures. You should be consistently monitoring employee voluntary and involuntarily terminations by the plan sponsor — and management should be ongoing. Don’t forget to consider turnover trends during the plan year, as well as across multiple years.
• Document all your terminations. It may be necessary to prove to the IRS whether a departure was voluntary or involuntary for the turnover calculation. Note that the IRS could classify voluntary terminations as involuntary terminations if you can’t provide support for the nature of the employee’s departure.
• Manage your forfeiture accounts. The balance of forfeiture account can include a variety of sources, including funds previously forfeited from participant accounts that are affected by a partial plan termination. The funds in the forfeiture account may be needed to reinstate the accounts of the affected participants.
• Correct vesting failures. The IRS offers the IRS Employee Plans Compliance Resolution Systems that can be used to correct this compliance failure.

How MGO Can Help

Partial 401(k) terminations can bring additional challenges for your company. MGO can help you maintain the integrity of your plan, avoid penalties, and manage the financial impact of partial terminations.

Our team can assist in identifying potential partial terminations by monitoring your employee turnover and workforce reductions that could trigger these events. We can help you stay compliant with IRS rules to avoid plan disqualification and review your plan documents, vesting provisions, and forfeiture accounts to confirm they are aligned with current laws and regulations.

Reach out to our team today to learn more.

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