New Rules for Part-time Employee Participation to Go into Effect

Plan sponsors are reminded that the SECURE Act requires employers to include long-term, part-time workers as eligible to participate in 401(k) plans other than collectively bargained plans, effective for plan years beginning on or after January 1, 2021. For purposes of elective deferrals, plans must extend eligibility to any part-time employee who has worked at least 500 hours in each of the immediately preceding three consecutive 12 month periods and is age 21 or older. Before the SECURE Act, part-time workers could be excluded if they had not worked 1,000 hours in a 12-month eligibility period. Thus, plan sponsors should be prepared for these new employee eligibility requirements.

What You Should Know

  • Plans will need to be reviewed and amended to incorporate the new eligibility rules. Some employers may choose to avoid the tracking of hours for long-term, part-time employees by amending their plans to allow all part-time employees to participate.
  • Plans are not required to take into account hours of service in plan years beginning before January 1, 2021, for purposes of determining whether an employee has worked at least 500 hours per year in three consecutive years.
  • Affected plan sponsors will need to start tracking hours beginning in 2021, even though plans will not be required to permit qualifying long-term, part-time employees to make deferrals under 401(k) plans before plan years starting in 2024.
  • There is no requirement to provide matching or other employer contributions to these part-time employees qualifying for elective deferrals, and special nondiscrimination and top-heavy testing relief would be provided to ensure that extending participation eligibility to these part-time employees does not adversely affect nondiscrimination testing.
  • The three consecutive years during which part-time employees work at least 500 hours will count towards vesting of employer contributions.
  • 401(k) plan sponsors should begin to analyze and address the impact of the change to address issues, including systems changes needed to track hours and deciding if they will make qualifying long-term, part-time employees eligible for employer contributions.