One of the primary objectives of the SECURE Act of 2019 is to increase access to retirement plans at work for more individuals. To accomplish this goal, lawmakers enhanced employer incentives for establishing workplace retirement plans and changed eligibility rules to ensure that “long-term, part-time” employees are allowed to defer a portion of their paychecks into a 401(k) plan.
Beginning January 1, 2021, employers must track part-time employees’ hours of service for purposes of calculating eligibility to participate in a 401(k) plan. This tracking may require changes to payroll processes such as including these employees in data files provided to the plan recordkeeper. While these changes needed to track part-time employees must begin in 2021, employers will have three years (i.e., until 2024) before these employees will be eligible to defer into the plan under the new rules. This gives employers time to evaluate how adding part-time employees to the plan will affect plan operations, nondiscrimination testing, and plan costs.
In the meantime, you may want to work with your financial advisor to review your objectives for your retirement plan and evaluate how these new rules may affect those objectives (e.g., keeping plan costs low, rewarding long-term employees). Your recordkeeper and/or third party administration (TPA) can assist you in complying with the new tracking requirements.
Following is a summary of the changes made by the SECURE Act:
new Eligibility Rules for 401(k) deferrals
Under the existing eligibility rules, employees can be required to perform 1,000 hours of service in a 12-month period and be at least age 21 to be eligible to make salary deferrals into the plan. An employer may set lower requirements than this or set none and allow all employees to participate.
Beginning in 2024, employers must allow an employee who has worked at least 500 hours per year for three consecutive years to make salary deferrals into the plan if they are at least age 21 by the end of the three-year period. Once a part-time employee has satisfied the service and age requirement, they will enter the plan according to the entry dates selected in the plan document. Plans may be designed to allow entry immediately upon satisfying eligibility requirements, or monthly, quarterly, or semi-annually.
No Requirement to make employer contributions But must count years of vesting services
Under the existing eligibility rules, employees may be required to complete up to two years of service (working 1,000 hours each year) and be at least age 21 to be eligible to receive employer matching or profit-sharing contributions. (If two years of service are required, the employer will not be able to attach a vesting schedule to the matching or profit-sharing contributions.) Employers may also apply other requirements for employees to be allocated an employer contribution, such as requiring workers to be employed as of the last day of the plan year.
An employer can also choose to exclude certain “classes” of employees from participating. For example, employees covered by a collective bargaining agreement and nonresident aliens with no U.S. source income may be excluded, as can leased employees and even highly compensated employees.
Beginning in 2024, employees who meet the definition of long-time, part-time employees may be excluded from receiving employer contributions. This rule helps ensure that employers who make contributions to their plans are not overwhelmed by cost increases as a result of the potential influx of part-time employees into the plan.
If an employer chooses to provide employer contributions to part-time employees (or to employees who move from part-time to full-time status), the employer must apply the vesting schedule counting all years of an employee’s service.
Not required to be included in nondiscrimination testing
Long-term, part-time employees eligible to participate in the plan may be excluded from nondiscrimination testing (e.g., ADP/ACP tests and coverage testing) as well. This may be beneficial to plans that would otherwise fail nondiscrimination testing as a result of having a significant number of part-time employees participating in the plan who are contributing small amounts.
Plan sponsor next steps
These law changes will require some administrative changes for employers to track eligibility requirements for part-time employees. Your recordkeeper and/or TPA can help make sure you are ready to begin tracking as of January 1, 2021 and meeting any compliance requirements. And, even though you have three years before these employees will be eligible to enter the plan as participants, you might want to start discussions with your financial advisor and plan design expert now to explore how these changes could affect your plan. A plan design expert can create projections using your employee demographic information to illustrate how plan design changes can impact testing results and plan costs.