The Setting Every Community Up for Retirement Enhancement (SECURE) Act that was signed into law in late 2019 included a number of provisions designed to expand retirement plan coverage to more employees. One of these provisions requires employers to let certain part-time employees participate in the company’s 401(k) plan starting in 2024.
Part-time employees’ eligibility to participate in their employer’s 401(k) will be based on the number of hours they worked during the three years preceding 2024. This means employers that offer 401(k) plans must begin keeping track of the hours worked by these employees starting this year.
What the Act Requires
According to the legislation, part-time employees who work between 500 and 999 hours per year for the three consecutive years preceding 2024 must be allowed to make elective deferrals into their employer’s 401(k) plan starting in 2024. The rule does not apply to 403(b) and 457(b) plans, which have different elective deferral requirements.
Note that the rule only applies to elective deferrals. The rules regarding employee eligibility to receive employer matching contributions have not changed — plan sponsors can still impose a service requirement for receiving employer matches that excludes many part-time workers. Plans can also still impose age requirements for 401(k) plan eligibility.
If an employer makes a non-vested contribution to a part-time employee’s 401(k) account, a unique vesting standard will apply. Under this standard, the part-time employee must be credited with one year of service if he or she works at least 500 hours during a 12-month period.
To Track Part-Timers’ Hours … or Not?
This new rule could present challenges for plan sponsors when it comes to keeping track of the number of hours worked by part-time employees. While this function may be outsourced to a plan recordkeeper, there are still data issues inherent in this type of tracking. Failure to plan ahead could result in operational compliance errors for some plans.
There are alternatives to counting the number of hours worked by part-time employees. The easiest is to simply allow all of your part-time employees to participate in the 401(k) plan, regardless of how many hours they work over the next three years. The cost to your business would likely be negligible since you wouldn’t have to make matching contributions and there probably wouldn’t be a rush of part-timers signing up, which would help keep average account balances and recordkeeping costs down.
You could also use equivalencies to credit the hours worked to satisfy the part-time service rule. In other words, part-time employees would be credited with a set number of hours for each period worked, such as 10 hours per day or 45 hours per week. The SECURE Act doesn’t directly address equivalencies, but experts believe this is a viable strategy.
Plan Your Strategy Now
Regardless of which strategy you choose, you should be planning now for how your retirement plan will comply with the SECURE Act’s part-time employee mandate. Failure to do so could cost your business thousands of dollars if you have to reimburse eligible part-time employees for missed contributions and lost earnings.