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SECURE Act – Part Time Participant Complexity

Full & Part Time 401k Participation
Part time eligibility adds recordkeeper complexity

While the SECURE Act was passed in 2019, one of the more onerous provisions is just taking effect now. The point of the SECURE Act was to expand participation in 401(k) plans, and allowing long-tenured, part-time workers to save is part of the program. Plan sponsors need to start record keeping for this provision now.

Before the SECURE Act, part-time employees generally were allowed to be excluded from participating in 401(k) plans. However, the new law requires that part-time employees who have completed three consecutive 12-month periods with at least 500 hours of service in each period be eligible to participate. Interestingly, this does not apply to 403(b) and 457(b) plans, which have their own unique rules for eligibility.

While it is not required, plan sponsors may opt to allow part-timers to share in employer contributions as well. Importantly, anyone working less than 1,000 hours in a year can still be excluded from the employer match.

Since three years of service are required, sponsors do not need to enroll part-time employees until at least January 1, 2024, however, they must start tracking hours for eligibility purposes. This could be a bit burdensome, but good payroll records can make the task easier.

For those not wanting to track hours, there are a couple options. First, you can allow for immediate eligibility. If your plan has a requirement of 1,000 for employer contributions, the cost to allowing part-time employees to make salary deferrals should be minimal and it could reduce the administrative burden of tracking hours.

The downside to this approach is that non-tracked part-time employees will count for discrimination testing purposes. If part-timers are eligible solely because of the new SECURE Act, they will not be part of the discrimination testing calculation. For plans making Safe Harbor contributions/matches, this will not be an issue.

Also, the DOL allows a plan to credit 45 hours per week or 190 hours per month to any employee who works at least one hour in the week or month. This reduces the need to track hours but could result in part-time employees becoming eligible for the plan earlier than they would otherwise, and it could even allow some to meet the requirement for employer contributions who would otherwise not qualify. Clearly, this second approach will not work for all plans.

The SECURE Act should result in more Americans being able to save for their retirement, which is a noble pursuit. However, there will be more considerations for plan sponsors, and likely new administrative burdens.