The SECURE Act seeks to expand retirement plan coverage for U.S. workers. One of the Act’s provisions changes 401(k) eligibility requirements for part-time employees.
Under the soon to be ‘old’ law, employees who did not meet the maximum statutory requirement (age 21 AND 1,000 hours in a 12-month period) could be excluded from participating in a 401(k) Plan. However, the SECURE Act requires that long-term, part-time, non-Union employees working 500 hours or more over consecutive 12-month periods must be permitted to make elective 401(k) deferrals.
The timeframe used to determine long-term part-time employees and first year of entry is currently being reconciled by Congress. The proposed effective date of the provisions as of the drafting of this alert is January 1, 2024. This rule does not apply to 403(b), 457 or SIMPLE IRA plans.
UPDATE: With the enactment of SECURE 2.0, part-time employees with three consecutive years of 500 hours of service from 2021 through 2023 will be eligible to defer in 2024. Beginning in 2025, a part-time employee only requires two years of consecutive service.
What Does This Mean for You?
Plans that currently exclude part-time, seasonal or temporary employees or require employees to complete more than 500 hours of service in a 12-month period will no longer be able to exclude these employees from elective 401(k) deferrals if they consecutively work greater than 500 hours.
To ensure that you are compliant with these new rules, you should review your payroll reporting to Sentinel to ensure all employees who receive compensation are reported with accurate hours of service. Any employees who were historically excluded from the Plan based on service should be reviewed, and if they meet the definition of long-term part-time employees, they will be required to have the opportunity to enroll in the plan for elective 401(k) deferrals under these new rules.
Important to Note
- Employees who become eligible for the elective deferral portion of the plan solely under the new rule may still be excluded for other types of contributions made to the 401(k) Plan (e.g., employer matching contributions, nonelective contributions, top heavy minimum contributions) until they meet the Plan’s eligibility requirements for such contributions.
- This new rule does not apply to nonresident aliens with no U.S. source income or union employees.
- For purposes of nondiscrimination testing, the employer can still exclude any long-term part-time employee who becomes eligible for the deferral portion of the plan until the employee meets the Plan’s eligibility requirements for testing.
Special Vesting Rule
The eligibility rules relating to employer contributions have not changed, so employers will not be required to make employer contributions for these long-term part-time employees. However, if an employer does voluntarily make employer contributions for long-term part-time employees and such contributions are subject to a vesting schedule, a special vesting rule must be applied with respect to these employees.
Under the new special vesting rule, and for purposes of vesting of employer contributions, a long-term part-time employee must be credited with a year of service ALL 12-month periods during which the employee had over 500 hours of service. This represents a change for many plans that include a 1,000-hour requirement for their vesting schedule. The Notice also clarifies that this special vesting rule applies only to those long-term part-time employees who become eligible to participate in a plan solely on account of this new rule. Finally, this special vesting rule will continue to apply to a long-term part-time employee even if such employee subsequently becomes a “full-time” employee.
In the Notice, the IRS confirmed that all years of service, even those beginning before January 1, 2021, will count under the special vesting rules, unless the plan is subject to certain exceptions (e.g., a plan may provide that years of service before an employee attains age 18 are excluded).
UPDATE: Years of 500-hour service prior to 2021 will not count under the SECURE Act special vesting rules for long-term part-time employees.
If you have any questions regarding how these law changes may impact your plan please reach out to your Plan Consultant.