Are You Tracking Part-time Employees for 401(k) Eligibility?

Through the SECURE Act, employers with a 401(k) plan must allow eligible long-term, part-time employees to contribute to the plan.

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Learn about the SECURE Act’s mandate regarding 401(k) plans and part-time workers

Allowing your long-term, part-time employees to join your 401(k) plan is a smart recruiting strategy. It’s also a key component of the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

Officially enacted on January 1, 2020, the SECURE Act aims to expand retirement plan access to Americans, by (among other things) incentivizing small businesses to offer 401(k) plans. For instance, the SECURE Act provides tax credits to small businesses that start a qualified retirement plan plus offers a new type of “multiple employer plan” that makes it easier for small, unrelated businesses to pool together and establish a single retirement plan.

Additionally, the SECURE Act contains a vital compliance requirement: starting in 2024, employers with a 401(k) plan must permit eligible long-term, part-time employees to contribute to the plan. While this may seem like a long way off, applicable employers must start tracking their part-time employees’ hours in 2021.

Which part-time employees are eligible?

Prior to the SECURE Act, 401(k) plans could exclude employees who worked fewer than 1,000 hours during the plan year or were under the age of 21. This hours’ requirement prevented many long-term, part-time employees from joining their employer’s 401k) plan. But thanks to the SECURE Act, this roadblock has been minimized.

Under the SECURE Act, non-union part-time employees who work between 500 and 999 hours in each of the previous 3 consecutive years must be permitted to contribute to their employer’s 401(k) plan, if they are at least 21 years old by the end of the 3-year period. These employees are referred to as “long-term, part-time employees.”

This component of the SECURE Act applies only to employee contributions (i.e., elective deferrals). It does not require employers to make matching contributions nor does it void the 1,000-hour rule. Consequently, employers can exclude employees who work fewer than 1,000 hours per year from the company match.

Under the SECURE Act, non-union part-time employees who work between 500 and 999 hours in each of the previous 3 consecutive years must be permitted to contribute to their employer’s 401(k) plan, if they are at least 21 years old by the end of the 3-year period.

When can long-term, part-time employees start participating?

The required participation start date is 2024. But if you want, you can let long-term, part-time employees participate in the plan before 2024.

As stated, the SECURE Act’s required 2024 start date applies to the previous 3 consecutive years. And as clarified by Internal Revenue Service (IRS) Notice 2020-68, for participation purposes, the “12-month periods beginning before January 1, 2021, are not taken into account.” Therefore, 401(k) plan sponsors must start tracking their part-time employees’ work hours starting January 1, 2021.

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When does vesting eligibility begin?

IRS Notice 2020-68 clarifies that employers can disregard the 12-month periods before 2021 when determining 401(k) participation eligibility, but not when determining years of vesting service for employer contributions. So, when figuring vesting eligibility (of employer contributions) based on years of service, you must consider the employee’s total employment — meaning all years of service.

Example of participation and vesting eligibility

Mary works for you on a part-time basis. Her employment with your company began on January 1, 2020, when she was 19 years old. Prior to the SECURE Act, you required part-time employees to work at least 1,000 hours in a 12-month period and to be at least 21 years old, in order to contribute to your 401(k) plan.

In 2020, Mary worked 700 hours. At that time, you excluded Mary from your 401(k) plan because she did not work at least 1,000 hours in a 12-month period and was not at least 21 years old.

But pursuant to the SECURE Act, you must start tracking Mary’s time in 2021, through to 2023 — to determine whether she’s eligible to participate in your 401(k) plan in 2024.

Let’s say Mary works the following hours from 2020 to 2023:

wdt_ID Year of Service Age Work Hours
1 2020 19 700
2 2021 20 600
3 2022 21 550
4 2023 22 750

Based on the above information, you must include Mary in your 401(k) plan starting 2024, because she turns 21 before the end of the previous 3-year period (2021-2023) and works between 500 and 999 hours during each of those 3 years. As the IRS stated, with regard to participation, you would not count Mary’s work hours for 2020.

In terms of vesting, any contributions Mary makes to her 401(k) as a part-time employee is immediately vested, meaning the funds immediately belong to Mary 100% at the time of payroll deduction. However, you require that employees work at least 1,000 hours for the year, in order to qualify for matching contributions. So long as Mary keeps working less than 1,000 hours in a year, you do not have to make matching contributions to her 401(k) account.

But if Mary starts working at least 1,000 hours in a year, then she’s eligible for the company match. Additionally, you’ll need to take each year during which Mary worked at least 500 hours (over the entire course of her employment), when determining which part of the company match is vested. Let’s say you utilize a “grading vesting” schedule, where the company match vests 20% each year, over 5 years. Since Mary works at least 500 hours per year from 2020 to 2024, her company match will be vested 100% at the end of the 2024 plan year.

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Time tracking: Can you get around it?

You can avoid time-tracking from a participation standpoint, by simply allowing all part-time employees to contribute to your 401(k) plan. Keep in mind, though, that the more employees you let into the plan, the more administrative responsibilities (and likely costs) you incur. Also, you may still need to track employees’ time, depending on the design of your vesting schedule for matching contributions.

You can make compliance with the SECURE Act easier by using time tracking software that integrates with your HR, benefits, and payroll functions.

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