The Internal Revenue Service’s Black Friday rule proposal clarifying how retirement plan fiduciaries should treat long-term, part-time employees was met in the retirement plan sector with a mixture of relief and consternation, according to posts by industry players and interviews.

“At the risk of sounding ungrateful, our Thanksgiving holiday was interrupted on Friday when the IRS finally issued the proposed regulations outlining how plans are supposed to comply with the Long-Term Part-Time Employee rules,” wrote Ilene H. Ferenczy, managing partner in Ferenczy Benefits Law Center, in a post. “While our notes may be covered with gravy and cranberry sauce stains, we were pleased to help translate these new rules for you as soon as we could.”

Others were less sanguine about the details of the rule proposals.

“Looks like the IRS made the SECURE Act/SECURE 2.0 provisions even more confusing than they already were, if that’s possible,” quipped Mike Webb, a senior manager at CAPTRUST, to a LinkedIn group focused on 401(k) fiduciary advice.

“IRS Delivers More Turkey on Black Friday,” Brian Graff, the CEO of the American Retirement Association, declared on LinkedIn the day the proposal came out. A few days later, the ARA sent a letter to the IRS—reported by its affiliate National Association of Plan Advisors outlet—calling the timeline “impossible” to meet for many plan sponsors, with a request for more administrative relief.

Attorneys at Seyfarth Shaw LLP were not very surprised that the IRS did not give more “transition relief,” as the rules had generally been available, and most of the clarifications were in-line with what they expected.

“Most of the guidance followed what we were hoping for, that answered some of our questions and had some good clarifications,” says Diane Dygert, a partner in Seyfarth Shaw who, with Sarah Touzalin, a senior counsel with the firm, wrote a post breaking down the proposal, “The Long Wait for the Long-Term Part-Time Guidance is Over.”

Clarity, With a Side of Questions

Dygert notes one key clarification was the basic definition of an LTPT employee, which the IRS settled on as an employee who has “completed two consecutive 12-month periods during each of which the employee is credited with at least 500 hours of service.” The employee also has to be at least 21 years old by the close of the last of the 12-month working period.

Another clarification noted by Dygert was establishing that employers may continue to use the “elapsed time method” when tracking an employee’s service time. In that method, employers document the overall period of time served. Employers who measure work that way can now “breathe easier,” Dygert says, because they will not have to start counting hours.

Rules addressing vesting requirements, however, did catch Dygert and Touzalin’s attention.

The proposed rules confirm that an LTPT employee does not need to be eligible to receive employer contributions. However, if LTPT employees are eligible for employer contributions (or later become eligible for employer contributions), when it comes to vesting, those employees must be granted a year of vesting service for each 12-month period in which the employee is credited with at least 500 hours of service. That is opposed to the 1,000 hours of service requirement generally used as a minimum by plans with a vesting schedule.

“I read that and was really surprised,” says attorney Touzalin.

After SECURE 2.0 was issued, Touzalin thought the “special” 500-hour vesting rule would only apply to an LTPT employee already eligible for both employee deferrals and employer contributions. She did not expect it would also apply to LTPT employees who were ineligible for employer contributions until they subsequently worked 1,000 hours.

“This is going to be difficult to administer, since plans will need to track different vesting rules for former LTPT employees and all other eligible employees,” Touzalin says.

Dygert further noted that the proposed rules would treat “former” LTPT employees more favorably than other eligible full-time employees who have to work more than 1,000 hours of service to earn a year of vesting service.

Dygert and Touzalin are not optimistic about this provision changing when the final rules are issued. However, Seyfarth attorneys plan to raise the issue with the IRS during the public hearing in March.

No Time for Leftovers

The ARA also mentioned vesting in its letter to the IRS, stressing the administrative burden the setup will create. It was the first of three arguments the group made for providing more time for administrative setup.

The second two areas concerned the timeline for plan sponsors, third-party administrators and recordkeepers to enact the changes.

The ARA first noted that the LTPT rules, slated to go into effect for 2024, are actually live for the 2023 period for some plan sponsors because of their plan-year definition.

“It is extremely common for 401(k) plans to switch from an anniversary year computation period to a plan year computation period for eligibility determinations,” the ARA wrote. “A plan that uses a plan-year switch for eligibility computation periods could have LTPTEs entering during 2023 if it is a non-calendar year plan.”

In its third point, the organization noted that the implementation date of January 1, 2024, will mean only 25 working days for the proposed regulation to be implemented. The ARA went on to list nine steps that will need to be taken to properly institute the new rules.

“It is impossible for plan service providers to complete all these steps for all impacted plan sponsors prior to January 1, 2024,” the ARA wrote.

The IRS did not immediately respond to requests for comment on the reactions.

Public comments on the proposed rule are due by January 26, 2024, via www.regulations.gov (under REG-104194-23). A public hearing will be held on March 15 for individuals who request to speak by January 26.