Signed into law in Dec. 2019, the SECURE (Setting Every Community Up for Retirement Enhancement) Act made some significant changes to retirement plans in 2020 and beyond. One of those noteworthy changes is employee participation rule for part-time employees. Certain businesses and organizations will be required to include long-term part-time employees into their retirement plans, if not already.

Long-Term Part-Time (LTPT) Employees

For employers maintaining a 401(k), an important upcoming change is the requirement to expand eligibility to long-term, part-time (LTPT) employees, effective for plan years beginning on or after January 1, 2021. Under this statute, if a LTPT employee has worked at least 500 hours in three (3) consecutive years and is at least age 21, he or she must be given the opportunity to make 401(k) salary deferrals. The good news for many businesses is that for purposes of determining whether an employee has worked at least 500 hours per year in three consecutive years, they’re not required to take into account hours of service in plan years beginning before January 1, 2021. Therefore, although affected plan sponsors will need to start tracking hours for this purpose beginning in 2021, plans will not be required to permit qualifying LTPT employees to make deferrals under 401(k) plans before plan years starting in 2024.

This rule does not impact not-for-profit employers who sponsor 403(b)s, for such plans must abide by “Universal Availability” rules which prevents tax-exempt employers from placing conditions for purposes of employee 403(b) contributions.

Employer Contributions & Testing

Again, plans only have to include LTPT employees for purposes of salary deferrals, not employer contributions. You can still require up to one (1) year of service for matching or profit sharing contributions. Another good news: LTPT employees do not have to (but can) be included for purposes of the plan annual non-discrimination testing, coverage testing and top heavy. Whether or not to include them on testing should be discussed with your trusted retirement plan service provider, as it can have major impact depending on the organization size.

Administrative Complexity

Prior to the SECURE Act, plans could, but were not required to, place conditions 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. This does add some complexity for plan sponsors. How so? Plan sponsors will need to track hours for part-time employees over the three-year tracking period to determine if and when a part-time employee becomes eligible to make salary deferrals. But not to worry as your trusted service provider should be able to guide you. Also and as mentioned, this requirement goes into effect for plan years beginning on or after January 1, 2021. That means that the first opportunity for LTPT employees to enter the plan under this new law is January 1, 2024. And that means employees would need to work at least 500 hours in 2021, 2022, and 2023 to be eligible for the plan as of 1/1/2024.

Be Prepared

So what can plan sponsors do to prepare? Take advantage of the time. Review your plan and, if necessary, put together a process in place to track and record hours that all your part-time employees work throughout the year, beginning 1/1/2021 (for calendar year plans). If you already have a process in place, that’s great! But if not, tracking hours will make it easier to know which part-time employees are eligible come 2024.

Final Words

Many questions still remain unanswered, including whether plan sponsors are required to track employees’ hours based on actual hours, or use the elapsed time or other method. We should be hearing from the IRS soon. For now, 401(k) plan sponsors should review their current eligibility requirements to evaluate and address the impact before 2021 kicks into full gear.