Employers: Are You Tracking Hours for Your Part-Timers’ 401(K) Eligibility?

By Janice M. Fortin, CPA, MST, Shareholder

The recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Acts of 2019 and 2022 created more retirement plan benefits for U.S. workers, including for part-time employees, who may soon be eligible to participate in their employer’s retirement plans.

Initially, the SECURE Act allowed part-time workers who had met the plan’s age requirement to become 401(k) eligible if they worked between 500 to 999 hours for three consecutive years, with plan entry beginning in 2024. However, the SECURE Act 2.0 revised the 401(k) eligibility rules to 500 to 999 hours of service for two consecutive years, beginning Jan. 1, 2025. Plan options were also expanded to include 403(b) plans in addition to 401(k)s.

The new SECURE 2.0 rule does not impact participation for part-time employees who become eligible beginning Jan. 1, 2024, under the initial SECURE Act of 2019. With this in mind, plan providers should already be tracking their hours beginning with the 2021 plan year.

Below is an overview to assist with your plan eligibility tracking requirements:

Provision Rules

The new 401(k) provision for part-time employees applies only to elective deferrals, meaning plan providers can still impose their own eligibility rules that may exclude some of these employees from sharing in employer contributions. For example, part-timers who work less than 1,000 hours a year can also still be excluded from matching and other employer contributions.  

Although these eligibility requirements may keep part-time employees from participating in employer contributions, the hours of service worked during 2021 or later by part-time employees will still count toward employer contribution vesting purposes. Initially, the IRS interpreted the original SECURE Act to require employers to take service hours worked prior to 2021 into account. However, SECURE 2.0 reversed this rule, and effective for 2024, service hours worked prior to 2021 are not taken into account for vesting purposes.  

Keep in mind, this new provision will not impact the plan’s nondiscrimination testing in any capacity. 

Plan Now

With 401(k) eligibility for part-time employees expected to begin in 2024, it is imperative employers track their hours to have accurate documentation and determine their eligibility. This will also be useful information for future audits. To obtain assistance with handling this new rule or to learn more, contact a member of our dedicated Employee Benefit Plan Group today.