For part-time workers, saving for retirement can be a challenge. Many part-time employees are often excluded from 401(k) plans because they often don’t meet the plan’s eligibility requirements.
While many Plan Sponsors may want to allow part-time employees to participate and contribute their own funds as 401(k) deferrals, compliance testing and required company contributions have made this a design-based challenge to implement. This has led to systemic exclusion of many students, parents and individuals with multiple part-time jobs from their employers 401(k) Plans.
However, new legislation that goes into effect on January 1, 2024, is about to change that and creates a WIN-WIN balance for Plan Sponsors and Long-Term, Part-Time (LTPT) employees.
2024 And Secure 1.0
Effective on January 1, thanks to the SECURE and SECURE 2.0 provisions, employer sponsored 401(k) plans are required to allow employees who have worked more than 500 hours of service in three consecutive 12-month periods to contribute elective deferrals to the plan. Let’s look at an example.
Example 1
Alex was hired in 2016 as a part-time employee. She has never been able to participate in the company’s 401(k) plan because she didn’t meet the 1000 hours requirement. In 2021, 2022 and 2023, she worked 600 hours per year. She has completed three consecutive 12–month periods with more than 500 hours, so she can enter the plan on January 1, 2024.
Example 2
Riley was hired on May 15, 2021 as a part-time employee. He worked 400 hours in 2021, 600 hours in 2022 and 600 hours in 2023. On May 15, 2024, he completed three consecutive 12-month periods; however, he did not work enough hours to be eligible.
Importantly, employers must properly track employee hire dates and hours worked to determine eligibility. Tracking hours is crucial to determining employee eligibility for the plan, including tracking periods starting from January 1, 2021 (since that date going forward determines eligibility). Additionally, employers should be aware of the administrative burden involved in operating their plans and how these changes will affect plan operations under the LTPT provisions.
According to these rules, employers are not required to make employer contributions to the accounts of LTPT employees, which includes contributions under safe harbor 401(k) plan provisions & Top Heavy Minimums but if employers want, they can. Additionally, employers can choose to exclude employees from nondiscrimination testing related to elective deferrals, employer match and nonelective contributions. Contact CrossPlans for more specifics.
2025 and beyond
For 2025 and with the modifications in SECURE 2.0, the rules change again. An employee only needs two consecutive 12-month periods with more than 500 hours of service to be eligible to participate in the company’s 401(k) plan.
Example 3
Riley was hired on May 15, 2021 as a part-time employee. He worked 400 hours in 2021, 600 hours in 2022, 600 hours in 2023 and 400 hours in 2024. He has completed two consecutive 12-month periods with more than 500 hours; he is eligible to participate in the company’s 401(k) plan on the next entry date.
Understanding Plan Eligibility
In summary, the LTPT provisions are a significant change to retirement plan eligibility requirements. While the SECURE 1.0 and 2.0 Acts offer solutions, employers must take action to properly track employee hours and ensure they become aware of their eligibility for the plan.
Employers should also evaluate their plan design and consider whether allowing all employees to contribute immediately upon hire would be worthwhile. By working closely with CrossPlans and your plan advisor, employers can ensure that they are meeting the requirements of the SECURE 1.0 and 2.0 Acts and offering employees the best possible retirement savings opportunities.
Interestingly and following up on our recent piece on the new Large Plan Audit Rules, it is our current understanding that LTPT will be included in account balance tracking/counting for Large Plan Audits. Please speak to CrossPlans or your Large Plan CPA Auditor.
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This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements. Consult your attorney or tax advisor for guidance on your specific situation.
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