Retirement plan years beginning in 2021 have a new recordkeeping requirement, thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. If you have part-time employees, read on.
Understanding the rule
Under the act, your plan will have dual eligibility requirements for part-time employees. Employees who are classified as part-time employees and complete one year of service with at least 1,000 hours are eligible to participate in your plan. If such employees fail to meet this requirement, they are eligible to participate in the plan if they:
- Have completed at least 500 hours of service for three consecutive years, and
- Are at least 21 years old by the last day of the same three-year period.
You can opt to allow part-timers to make deferrals immediately. An employee who meets the above requirements for 2021, 2022 and 2023 will be eligible to enter the plan effective January 1, 2024 (for calendar year plans). Plan sponsors will need to track part-time employees’ hours to accurately determine eligibility for the plan.
For employees who are solely eligible as a result of meeting the new three-year requirement, plan sponsors may elect to exclude such employees from nondiscrimination, coverage and top-heavy testing
The SECURE Act doesn’t address recordkeeping directly and, as of this writing, applicable regulations haven’t been issued. However, you might be able to simplify the recordkeeping process by making generous assumptions about the number of hours part-time employees actually worked during any fixed work period.
For example, you could credit a part-timer for 10 hours of work for any day worked, or 45 hours for any week, and so on. Using this method, you’ll probably credit part-timers with more service hours than they perform, but you’ll spend less time tracking actual hours worked.
Alternatively, you could open the door (without making matching contributions) to all part-time workers. Doing so would eliminate the need for tracking part-timers’ hours altogether. Chances are you wouldn’t be inundated by part-timers wishing to join your plan in the absence of an employer match.
Making the choice
Keep in mind that, because no match is required, allowing eligible part-time employees to make deferrals into your 401(k) plan doesn’t cost anything — unless you cover some participants’ recordkeeping fees. If, down the road, you decide to match part-timers’ deferrals, you can also use the service hours tracked for determining participants’ eligibility for vesting. Remember, vesting is pertinent for only employer matching contributions; participant deferrals aren’t subject to vesting.