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Can Part-Time Workers Participate in 401(k) Plans?

February 01, 2022

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, part time workers can now participate. Here’s what you should know.

The SECURE Act of 2019 made the biggest changes to retirement plans since 2006, including a notable change to part time workers’ participation in 401(k)s.

What is the SECURE Act?

The Act aims to address the looming retirement crisis. According to a recent survey, only 44% of non-retired adults believe they have enough income throughout retirement. The survey also reveals that 25% of Americans have no retirement savings or pension.

The SECURE Act intends to strengthen retirement security across the country and make it easier and less costly for small businesses to offer 401(k) plans, so that more people have access to a retirement savings vehicle.

Refer to our previous blog, for a more detailed summary of what you should be doing, especially since a plan amendment needs to be done in 2022.

Part-time workers can now participate in 401(k) plans

In the past, employers have been able to exclude part time employees from participation in 401(k) plans. The new rules hold that employees who have either worked at least 1,000 hours in one year or three consecutive years of at least 500 hours can participate in a 401(k) plan. Collectively bargained plans are exempt.

This will be particularly notable for those in the hospitality industry with seasonal workers.

When is this change effective?

Starting in 2021, an employee who works between 500 and 1,000 hours in each of the last 3 years would be eligible to participate in a 401(k) plan. For many plans, the first year that any long-term part-time worker will be eligible to participate will be the 2024 plan year (3 years after 2021). Most plans also require employees to be at least 21 to participate and at least 18 for vesting. Employers need to start keeping track of hours in 2021 to assess who meets the hours requirement and is eligible to participate in 2024.

The deadline to adopt this SECURE Act plan amendment is the last day of the first plan year beginning on or after January 1, 2022 (December 31, 2022).

What should employers do?

  • Coordinate with payroll providers to ensure they started to track hours as of January 1, 2021 for part-time employees.
  • Consider how records of hours will be retained for multiple years (eligibility is considered over 3 consecutive years not a single year at a time).
  • Consider whether you will allow these part-time employees to share in employer contributions.
  • Consider whether or not you will impose the age restrictions on vesting and plan participation.
  • Work with your third-party administrator to update loan documents, summary plan descriptions and other plan communications to reflect the new rules.

Questions? Contact us.

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