The Setting Every Community Up for Retirement Enhancement (SECURE) Act mandates plan sponsors to offer participation in their 401(k) plan to long-term part-time employees. Below are answers to some frequently asked questions about this new requirement.
Who is considered a long-term part-time employee?
For purposes of participation in a 401(k) plan, an employee is considered a long-term part-time employee after completing three consecutive 12-month periods with at least 500 hours of service in each period and attaining age 21. This employee must be offered the opportunity to make elective deferrals into the 401(k) plan. Prior to the SECURE Act, employers could require employees to work 1,000 hours of service in a 12-month period and attain age 21 before allowing participation in a 401(k) plan.
What is the effective date of this new requirement?
The requirement becomes effective for plan years beginning after December 31, 2020. This does not mean that long-term part-time employees must be included in the plan effective for years beginning in 2021. It means 2021 is when employers must start counting hours for eligibility purposes to determine when the three consecutive 12-month period has been met. Service prior to January 1, 2021 is excluded for determining eligibility to participate. The earliest date employers are required to include long-term part-time employees in plans is January 1, 2024.
For example, John is a part-time employee having 600 hours of service every year from 2018 through 2023. John’s three consecutive 12-month years are 2021, 2022, and 2023, and he would enter the plan under the long-term part-time rules in 2024.
Is the employer required to make contributions for long-term part-time employees?
No, the new requirement applies only to employee 401(k) elective deferrals. Employers are not required to make contributions for long-term part-time employees, including top-heavy minimum benefits. The inclusion of this employee group will not affect coverage or non-discrimination testing.
How is vesting determined for long-term part-time employees?
Employee elective 401(k) deferrals are always 100% vested. If the employer makes contributions for long-term part-time employees, a special vesting rule applies that requires the employee to be credited with a year of vesting service for each year that an employee completes 500 hours of service. The IRS has clarified that 12-month periods before January 1, 2021 are not excluded for purposes of determining years of vesting service. In our example, John would have six years of vesting service and enter the plan 100% vested in employer contribution accounts.
Are 401(k) plans required to be amended to comply with the new requirement?
Yes, the SECURE Act provides that plan amendments will be required generally at the end of the 2022 plan year.
What are next steps for plan sponsors of a 401(k) plan?
It is recommended that 401(k) plan sponsors start keeping track of hours of service for long-term part-time employees beginning in 2021. If employers intend to make contributions for such employees, they should also identify all years in which such employees worked more than 500 hours to properly credit years of service for vesting.