It is common for a Plan Sponsor to require employees to meet minimum age and service requirements before they can make salary deferral contributions to the 401(k) plan. The maximum age requirement is 21, and the maximum service requirement is 1 Year of Service (completion of 1,000 hours of service in a 12- month period of service). This means employees who work fewer than 1,000 hours in a 12-month period of service may never qualify to make salary deferral contributions to the plan.
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) requires Plan Sponsors to allow Long-Term Part-Time (LTPT) employees to make salary deferral contributions in the 401(k) plan, regardless of the plan’s service requirement. A LTPT employee is an employee who has worked at least 3 consecutive 12-month periods AND completed at least 500 hours of service in those periods. Note that the plan’s age requirement (up to 21) will still apply, and this requirement does not apply to 403(b) or 457(b) Plans.
Although this mandatory coverage requirement is effective for plan years beginning on or after January 1, 2021, service prior to the effective date may be ignored for this purpose, meaning that no LTPT employees will need to be permitted to defer prior to 2024.
As this requirement may create dual eligibility requirements under the plan, Plan Sponsors and their service providers must monitor both the existing service requirement (assuming it is not as favorable as the requirement applied to LTPT employees) and the eligibility requirements applicable to LTPT employees.
Vesting for Long-Time Part-Time Employees
LTPT employees who become eligible to defer into the plan, will earn a year of vested service if they work more than 500 hours of service during the 12-month period. Note that vested Years of Service only apply to employer contribution accounts.
No Requirement to Give Employer Contributions to Long-Time Part-Time Employees
The SECURE Act does not require a Plan Sponsor to make matching, profit sharing, Safe Harbor or Top Heavy minimum contributions (if applicable) to LTPT employees. LTPT employees who become eligible to defer are excluded from coverage and nondiscrimination testing.
Plan Sponsor Next Steps
- Establish a process to monitor and track hours worked by part-time employees, beginning with the first plan year on or after January 1, 2021. Hours worked prior to the effective date of this requirement are disregarded.
- Check with your payroll provider or other service providers to determine if they will monitor eligibility to minimize your time and increase accuracy of identifying LTPT employees.
- Review your 401(k) plan’s age and service requirements to determine if they are meeting your goals and if maintaining dual eligibility requirements are necessary.
- Check with your plan’s service providers to determine if there will be any impact to plan fees and expenses. Some service provider’s fees are based on the number of participants or the average account balance in the plan. As a result of this requirement, your plan’s participant count may increase while the average account balance may decrease.
Contact your TRA Regional Sales Consultant with questions on the SECURE Act.