Prior to the passage of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), U.S. 401(k) plans could exclude employees who had completed less than 1,000 hours of service in a plan year. However, beginning in 2021, in an effort to expand retirement plan participation, the SECURE Act will require 401(k) plans to expand eligibility to long-term, part-time employees.
Who is a Long-Term, Part-Time Employee?
A long-term, part-time employee is any employee who has completed at least 500 hours of service in each of the last three consecutive 12-month periods.
What’s New in 2021?
Eligibility to Make 401(k) Contributions
Plan sponsors need to start tracking the service of nonunion, long-term, part-time employees who have attained age 21 as they must be eligible to make elective deferrals to their employer’s 401(k) plan after three consecutive plan years. Plan years beginning prior to January 1, 2021, will not be taken into account for eligibility purposes, so the earliest a plan will be required to allow elective deferrals by long-term, part-time employees is January 1, 2024.
Employers may, however, continue to exclude long-term, part-time employees from other types of employer contributions, such as matching contributions and nonelective employer contributions, until they meet the eligibility requirements for such contributions. Employers may also exclude long-term, part-time employees for purposes of nondiscrimination and top-heavy testing.
Different Rules for Vesting Service
Any year in which a long-term, part-time employee has attained age 18 and completed at least 500 hours of service must be considered for vesting purposes, including years beginning prior to January 1, 2021.
What Should Employers Do Next?
- Coordinate with plan administrators and recordkeepers to ensure they are prepared to track hours for part-time employees effective January 1, 2021.
- Consider whether such expanded eligibility will also apply to employer nonelective and/or matching contributions (note that such expanded eligibility is not mandatory).
- Confirm accessibility of necessary hours data for determining vesting service for periods beginning prior to January 1, 2021.
- Amend plans by the last day of the first plan year beginning on or after January 1, 2022 (e.g., December 31, 2022, for calendar-year plans) to provide for long-term, part-time employee participation.
- Update plan documents, summary plan descriptions, enrollment materials, and other plan communications to reflect the new rule.
- Consider plan design changes to ease the administrative burden, such as expanding 401(k) plan eligibility to all part-time employees or modifying the vesting schedule for employer contributions.
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