Employers that exclude employees who work fewer than 1,000 hours per year from their 401(k) plans need to reevaluate their plan’s eligibility and vesting rules in light of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). Many employers require employees to work 1,000 hours in a 12-month period to become eligible to participate in the plan and to work at least 1,000 hours each plan year to earn a year of vesting credit. The effect of this 1,000-hour threshold is to generally exclude part-time, seasonal or temporary employees who don’t earn at least 1,000 hours of service in a 12-month period—leaving them without the ability to save for retirement under the employer’s 401(k) plan. One of Congress’ goals in passing the SECURE Act was to increase the number of employees covered by 401(k) plans, so it included a new rule that changes how 401(k) plans treat what we are calling long-term part-time employees.
Under the SECURE Act, 401(k) plans must allow long-term part-time employees to participate in the plan only with respect to making elective deferral contributions. This rule does not impact eligibility for contributions from the employer, but if you will have two different eligibility rules, you will need to review your processes for tracking two eligibility requirements. This new rule applies to part-time employees who have worked at least 500 hours in the preceding three consecutive 12‑month periods, subject to meeting the plan’s age requirement, if any. The three consecutive 12-month periods begin January 1, 2021, so a participant will not become eligible under this rule until the first three 12-month measurement periods end (i.e., 2024). However, employers need to be ready to track hours for part-time employees starting January 1, 2021.
This new rule also affects vesting. For employees becoming eligible under this new long-term part-time employee rule, a year of service for vesting purposes is a 12-month period during which the employee has at least 500 hours of service. While hours before 2021 are not counted for plan eligibility purposes, they are generally counted for determining whether the employee earned a year of service for vesting purposes so you will need to provide vesting credit for past service before 2021 for long-term part-time employees. That vesting credit will only become relevant for those participants who become eligible for employer contributions that are subject to a vesting schedule.
Importantly, this rule only requires that these participants be allowed to make employee contributions—it does not require that they also receive employer contributions. It also provides nondiscrimination and top-heavy plan relief for this group of newly eligible participants. Finally, this rule does not apply to employees who are otherwise excluded from the plan, such as those employees subject to a collective bargaining agreement.
This new rule is effective January 1, 2021, so it is important to start considering how this change will affect your plan. You will likely need to work internally and with your service providers to ensure that you are ready to properly track a part-time, seasonal or temporary employee’s hours of service for purposes of eligibility and vesting. You may also need to amend the plan and summary plan description to reflect this new rule. The amendment deadline is the last day of the plan year beginning on or after January 1, 2022, so the deadline is December 31, 2022, for calendar year plans.
If you have any questions about the new long-term part-time employee rule or if you would like to discuss strategies for how to prepare your plan for compliance, please contact Justin Stemple or any member of Warner’s Employee Benefits/Executive Compensation Practice Group.
