Are You Tracking Part-time Employees for 401(k) Eligibility?

Allowing your long-term, part-time employees to join your 401(k) plan is a smart recruiting strategy. It’s also a key component of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Officially enacted on January 1, 2020, the SECURE Act aims to expand retirement plan access to Americans, by (among other things) incentivizing small businesses to offer 401(k) plans. For instance, the SECURE Act provides tax credits to small businesses that start a qualified retirement plan plus offers a new type of “multiple employer plan” that makes it easier for small, unrelated businesses to pool together and establish a single retirement plan. Additionally, the SECURE Act contains a vital compliance requirement: starting in 2024, employers with a 401(k) plan must permit eligible long-term, part-time employees to contribute to the plan. While this may seem like a long way off, applicable employers must start tracking their part-time employees’ hours in 2021.

Which part-time employees are eligible?

Prior to the SECURE Act, 401(k) plans could exclude employees who worked fewer than 1,000 hours during the plan year or were under the age of 21. This hours’ requirement prevented many long-term, part-time employees from joining their employer’s 401k plan. But thanks to the SECURE Act, this roadblock has been minimized. Under the SECURE Act, non-union part-time employees who work between 500 and 999 hours in each of the previous 3 consecutive years must be permitted to contribute to their employer’s 401(k) plan, if they are at least 21 years old by the end of the 3-year period. These employees are referred to as “long-term, part-time employees.” This component of the SECURE Act applies only to employee contributions (i.e., elective deferrals). It does not require employers to make matching contributions nor does it void the 1,000-hour rule. Consequently, employers can exclude employees who work fewer than 1,000 hours per year from the company match.

Under the SECURE Act, non-union part-time employees who work between 500 and 999 hours in each of the previous 3 consecutive years must be permitted to contribute to their employer’s 401(k) plan, if they are at least 21 years old by the end of the 3-year period.

When can long-term, part-time employees start participating?

The required participation start date is 2024. But if you want, you can let long-term, part-time employees participate in the plan before 2024. As stated, the SECURE Act’s required 2024 start date applies to the previous 3 consecutive years. And as clarified by Internal Revenue Service (IRS) Notice 2020-68, for participation purposes, the “12-month periods beginning before January 1, 2021, are not taken into account.” Therefore, 401(k) plan sponsors must start tracking their part-time employees’ work hours starting January 1, 2021.

When does vesting eligibility begin?

IRS Notice 2020-68 clarifies that employers can disregard the 12-month periods before 2021 when determining 401(k) participation eligibility, but not when determining years of vesting service for employer contributions. So, when figuring vesting eligibility (of employer contributions) based on years of service, you must consider the employee’s total employment — meaning all years of service.

Example of participation and vesting eligibility

• Mary's employment history:

  • Mary works part-time for your company since January 1, 2020, starting at age 19.

• Pre-SECURE Act policies:

  • Requirement: Part-time employees to work 1,000 hours/year and be 21+ for 401(k) contributions.
  • Mary's 2020: Worked 700 hours; not eligible for 401(k) due to hours and age.

• SECURE Act implications:

  • Time Tracking: Mary's hours tracked from 2021 to 2023 for 2024 eligibility.

• Hours worked (2020-2023):

  • 2020: 700 hours.
  • 2021-2023: Between 500 and 999 hours each year.

• Inclusion in 401(k) plan (2024):

  • Eligibility Criteria: Turns 21 before 2021-2023 period ends.
  • Works 500-999 hours annually from 2021 to 2023.
  • Conclusion: Mary included in 401(k) from 2024.

• IRS statement on participation:

  • Exclusion of Mary's 2020 hours from participation count.

• Vesting and contributions:

  • Mary's Contributions: Immediately vested.
  • Matching Requirement: 1,000 hours/year for eligibility.
  • No Matching if <1,000 hours/year; eligible for match if ≥1,000 hours/year.

• Vesting schedule:

  • "Grading Vesting" Schedule: 20% vesting/year over 5 years.
  • Mary's Vesting: 100% by end of 2024 plan year (working 500+ hours annually).

Time tracking: Can you get around it?

You can avoid time-tracking from a participation standpoint, by simply allowing all part-time employees to contribute to your 401(k) plan. Keep in mind, though, that the more employees you let into the plan, the more administrative responsibilities (and likely costs) you incur. Also, you may still need to track employees’ time, depending on the design of your vesting schedule for matching contributions. You can make compliance with the SECURE Act easier by using time tracking software that integrates with your HR, benefits, and payroll functions.