Background on 401k Eligibility
Prior to the passage of the SECURE Act, employers could exclude long-term part-time employees (LTPT employees) that worked fewer than 1,000 hours per year from employer 401k contributions. This was done by implementing a one year of service waiting period requirement. The “one-year service” was defined as a 12 consecutive month period where the employee worked at least 1,000 hours.
How 401k Eligibility Changes with The SECURE Act
The SECURE Act was signed into law on December 20, 2019, and included a series of provisions, one of which expands access to workplace retirement plans to LTPT employees. The Act makes the most restrictive eligibility requirements (as noted above) less restrictive, for plan years beginning after December 31, 2020.
Beginning January 1, 2021, employers must allow LTPT employees to participate in the plan for 401(k) employee deferral purposes only once they have:
- Attained age 21, and
- Worked 3 consecutive 12-month periods, working at least 500 hours of service in each of those periods.
What Should Employers Do Differently?
Since 2021 is the first plan year to be affected, it will be important that employers have a mechanism in place on January 1 to note and record the hours that part-time employees work throughout the year. Then, three years from now, the employer will know which part-time employees are eligible to participate in the plan on January 1, 2024. This would include all part-time employees that are at least age 21 and have worked at least 500 hours in 2021, 2022, and 2023.
Additionally, employers should be aware of how this impacts other provisions in their retirement plans.
Employer Contribution vs. Eligibility Requirements
As mentioned earlier, the change only affects eligibility for employee 401(k) salary deferral contribution purposes. The LTPT employees will not be eligible for the employer contributions made to the plan (Safe Harbor, Profit Sharing, Matching, or Top-heavy minimums) until they satisfy the defined eligibility requirements contained in the employer plan document (i.e. attainment of age 21 and completion of one year of service). That said, the employer may include these employees in employer contributions if they so choose. But it should be noted that if they are included in the employer contribution, the vesting requirements will then be impacted as described below.
New Vesting Requirements
IF the employer chooses to include this group of employees in the employer contributions, the employer cannot require 1,000 hours of service for this group of employees to accrue a year of vesting service. Instead, the LTPT employees will accrue a year of vesting service for each year during which they have worked at least 500 hours’. The reduced hours requirement for vesting purposes will only apply if the employees have entered the plan solely due to the LTPT employee SECURE Act provision AND, again, only if the employer chooses to include this group of employees in the employer contributions.
Nondiscrimination Testing
It is also important to note that these employees will not negatively impact testing because they will not be included in the annual nondiscrimination testing. That means even though they are allowed to make deferrals, they will be disregarded for Coverage, ADP, ACP, and 401(a)(4) testing.
As life events and stages demand adjustments to your financial plan, SYM’s mission is to proactively attend to your financial realities as your advocate so that you can focus on relationships and enjoying life. To have SYM Financial Advisors work for you in Midland, Fort Wayne, Mishawaka, Warsaw, and Indianapolis areas call 800-888-7968 or email info@sym.com.
