Many employers find that providing supplemental benefits, such as retirement plan benefits, can help them recruit and retain an experienced workforce to serve in a variety of roles that include seasonal and part-time positions.
While the number of part-time positions in the U.S. has declined over the past few years, in the second quarter of 2023, more than 26 million people worked part time. This creates a unique situation for many employers that have to decide whether their part-time employees should receive many of the same benefits as their full-time employees.
Employers that choose to sponsor a qualified retirement plan can tailor plan documents to meet their specific needs, including defining the eligibility requirements. Often, employers will design their plan to require that employees work at least 1,000 hours during a year to become eligible to enter the plan. The result is that some part-time employees will never meet this eligibility criteria.
Over the past few years, Congress has initiated legislation to encourage retirement savings opportunities for all employees — regardless of their full- or part-time position. The SECURE Act of 2019 (SECURE 1.0) expanded eligibility by requiring employers to allow employees who have worked at least 500 hours in three consecutive years to participate in the salary deferral provision of their 401(k) plan.
The SECURE 2.0 Act shortened the three-year requirement to two years and expanded eligibility coverage to ERISA-covered 403(b) plans. As a result, more long-term, part-time employees soon will be able to participate in their employer’s retirement plan.
While the new two-year rule is now in effect, the older three-year rule still applies. Employers must allow employees who meet the older rule to make elective deferrals in their 401(k) plan in 2024. Under the two-year rule, 2025 will be the first year that long-term, part-time employees may make elective deferral contributions to either a 401(k) or 403(b) plan.
Starting with plan years beginning on or after January 1, 2021, employers have been required to track employees’ hours in order to satisfy the new long-term, part-time eligibility rule. If an employee works 500 or more hours in each of three consecutive years, the employer must allow the employee to make elective deferrals to a 401(k) plan in the following plan year.
No employer contributions are required to be given to these participants. In addition, special rules allow plan administrators to exclude from coverage and nondiscrimination testing employees who are eligible to participate solely because of the long-term, part-time rules. Employees also must still satisfy the plan’s age requirements.
NOTE: This timeline is for illustrative purposes only and is meant to reflect the earliest date on which an employee could enter a 401(k) plan.
Effective for 2025 and later plan years, SECURE 2.0 shortens the wait for long-term, part-time employees from three years to two and makes several changes, by including ERISA-covered 403(b) plans in this expanded coverage and amending the Internal Revenue Code to add the long-term, part-time provisions to ERISA, making this an enforceable right. Another noteworthy area is that pre-2021 service is disregarded for 401(k) plan vesting purposes, effective as if included in SECURE 1.0.
NOTE: This timeline is for illustrative purposes only and is meant to reflect the earliest date on which an employee could enter a 401(k) or 403(b) plan.
It’s important to note that the new laws only require an employer to permit long-term, part-time employees to make elective deferral contributions. An employer may, but is not required to, provide matching or profit-sharing contributions to employees who enter a qualified retirement plan under the long-term, part-time eligibility rules.
Employers will need to wait for additional guidance from the Department of Labor and Internal Revenue Service regarding certain details. They will include how vesting will be measured and applied for employees who enter a plan under the long-term, part-time eligibility requirements and how these employees affect certain compliance tests.
But what is clear from this point on is that access to important benefits will be widened for millions of part-time working Americans whose retirement readiness surely will be improved.