Reminder : Long-Term , Part- Time Employee Rules Effective January 1 , 2024
must be forfeited if it was calculated and funded during the year . Distribution of these excess funds must occur by April 15th .
Even with payroll software that limits the deferrals , there are several situations in which excess deferrals might occur :
• A participant who begins working for you may have made deferrals to a previous employer ’ s plan during the same calendar year . After meeting any eligibility and entry requirements , they then make deferrals into your plan . Combined , these deferrals may exceed the annual limit , which is individual rather than per-plan . This error is often discovered during the preparation of the participant ’ s tax return , and correction requests are typically received in the first few months of the year .
• When you make a change to your payroll providers or payroll software , deferral limits may be exceeded if year-to-date deferral information is not transferred correctly .
• If a participant ’ s date of birth was input incorrectly into your payroll software , the participant may be inadvertently permitted to make a catch-up contribution , even though they haven ’ t reached age 50 .
You may be asked to perform any necessary corrections regardless of whether or not the error occurred on your watch . The best way to prevent excess deferrals is to be sure that all deferrals are tracked in your payroll and that dates of birth are correct for all participants making catchup contributions . Most payroll software has a field to input deferrals made outside of that software ; if you hire a new employee , ask for their year-to-date deferrals , and ensure that this information is given to your payroll provider or entered into your software . If you make a payroll change during the year , check the year-to-date deferrals and ensure that they are correct for each employee .
Reminder : Long-Term , Part- Time Employee Rules Effective January 1 , 2024
As part of the Setting Every Community Up for Retirement Enhancement Act of 2019 ( SECURE Act ), part-time employees who worked at least 500 hours each year in 2021 , 2022 , and 2023 qualify as Long-Term , Part-Time ( LTPT ) employees . LTPT employees were eligible to make elective deferrals on January 1 , 2024 .
What happens if you missed enrolling one of these employees ?
Mistakes happen . When it comes to a missed deferral opportunity , the key is to correct the failure as soon as possible . This may include withholding the proper deferrals going forward , making an employer contribution to the plan , and providing the participant with a written notice regarding the failure . If you feel as though you missed offering an employee the opportunity to defer , please contact us immediately to remedy the situation rather than waiting until the end of the plan year .
What effect does this rule have on Solo 401 ( k ) ( One- Participant ) Plans ?
If a plan covers a business owner ( or owner and spouse ) but employees have not met plan eligibility requirements in the past , the new Long-Term , Part-Time ( LTPT ) rules will have an impact . As the company owner is no longer the only participant , the plan will now be subject to ERISA .
The ability for the employee to defer will not necessarily impact your employer contribution and testing , but it will have an impact on the plan ’ s filing status . This means that filing a Form 5500 or 5500-SF will be necessary , rather than filing a Form 5500-EZ . These forms require additional information to be reported , and are publicly available after filing , whereas Form 5500-EZ is not made public .
The plan will also need to be covered by a fidelity bond to protect the assets , even if part-time employees make no deferrals .
Keep the new LTPT rule in mind when hiring employees — even if not full-time — as they may have an unexpected impact on your plan . Continue to evaluate the status of your part-time employees as well so that you can be prepared for their eligibility for the plan .
REA & ASSOCIATES BENEFIT INSIGHTS | WINTER 2024 3