Currently, the law allows employers to design their retirement plans to exclude part-time employees who work less than 1,000 hours per year from plan participation. Under the SECURE Act, Congress elected to reduce eligibility standards to expand retirement plan coverage. Beginning in 2021, 401(k) plans are required to provide dual eligibility coverage—meaning that employees who have worked at least 500 hours per year for at least three consecutive plan years are eligible for salary deferrals. These changes take effect on January 1, 2021, for plan years beginning on or after that date. Service prior to 2021 does not need to be considered in determining the three consecutive year period. Therefore, the soonest an employee would be eligible to defer is January 1, 2024.
There are several things to note about this new rule:
·It only applies to long term part-time employees who meet the requirements and they will only be allowed to defer into the 401(k) plan (collectively bargained plans (union) are excluded from these requirements)
These employees may be excluded from all employer contributions and employers may impose a minimum age requirement (not exceeding age 21) even if their current plan provisions do not have an age requirement or have a lower age requirement
The employer may exclude these employees from nondiscrimination rules and top-heavy tests
Although long term part-time employees will not benefit from this change until 2024, employers need to act now. Employers must ensure that they have a system for tracking hours worked by part-time employees and that the system is in place beginning January 1, 2021, to avoid potentially owing part-time employees thousands of dollars in 2024. Remember that service before the year 2021 does not need to be taken into account for eligibility determination.
As with most new legislation, there are still unknowns. Some of the primary concerns relate to how employers are to handle employees who move in and out of part-time status and whether employers are required to track hours based on actual hours elapsed time, or yet another method? These questions will remain unanswered until we receive additional guidance from the IRS, so it is important for Plan Sponsors to remain in touch with their providers.