Reminder for 401(k) Plan Sponsors: Long-Term, Part-Time Employee Eligibility Requirements Take Effect in 2021 under the SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed a number of requirements for retirement plans in 2020 and beyond.
Certain changes under the SECURE Act already are in effect in 2020, including changes to the required minimum distribution rules for participants and beneficiaries, and changes to qualified automatic contribution arrangements under defined contribution plans, as discussed in more detail in our prior alert.
For sponsors of 401(k) plans, a key upcoming change is the requirement to expand eligibility to long-term, part-time employees, effective for plan years beginning on or after January 1, 2021. Under this rule, if a part-time employee has worked at least 500 hours in three consecutive years and is at least age 21 by the last day of the three consecutive year period, he or she must be offered the opportunity to make elective deferrals to the employer’s 401(k) plan. For purposes of determining whether an employee has worked at least 500 hours per year in three consecutive years, plans are not required to take into account hours of service in plan years beginning before January 1, 2021. As a result, although affected plan sponsors will need to start tracking hours for this purpose beginning in 2021, plans will not be required to permit qualifying long-term, part-time employees to make deferrals under 401(k) plans before plan years starting in 2024.
Before the SECURE Act, a plan could, but was not required to, impose a waiting period of up to one year (1,000 hours of service, for plans that use the hours tracking method to determine years of service). For 401(k) plans that currently require a year of service for eligibility purposes, the new SECURE Act coverage requirement will impact plan administration.
Initially, the SECURE Act change will impact plan administration because a plan will need to implement new systems for tracking and reviewing hours for part-time employees over the three-year tracking period, to determine if and when a part-time employee becomes eligible to participate. Going forward, the SECURE Act change will add administrative complexity because it will expand 401(k) plans’ eligibility and enrollment. Plan sponsors will have to address a number of related issues under 401(k) plans, including service crediting for vesting purposes, whether part-time employees will also be eligible for employer contributions under the plan (the SECURE Act change requires coverage for elective deferral purposes only, but a plan sponsor may want to align deferral eligibility with eligibility for employer contributions), and whether to exclude the long-term, part-time employees from nondiscrimination and coverage testing (long-term, part-time employees generally can be excluded for testing purposes under the SECURE Act).
A number of questions about implementing these requirements remain open, including whether plan sponsors are required to track employees’ hours based on actual hours, or use the elapsed time or other method. Regulations on this and other issues have not yet been issued, and may be delayed as a result of the coronavirus pandemic.
Regardless of the open issues, sponsors of 401(k) plans should review their current eligibility requirements to analyze and address the impact now, as the 2021 effective date is quickly approaching.