On December 12, 2019, Congress passed the “Setting Every Setting Every Community Up for Retirement Enhancement Act of 2019” (the “SECURE Act”). The SECURE Act included provisions regarding part-time employees that may require you to take action with respect to your 401(k) Plan. Generally, if you currently require an employee to work 1,000 hours of service in a twelve-month period in order to be eligible to participate and/or in order to be credited with a year of service for vesting, it is likely that you will need to modify that aspect of your Plan’s operation effective January 1, 2021 and amend your plan by the end of the 2022 plan year. SECURE Act, Section 112, is intended to allow long-term, part-time employees to participate in the employee deferral component of a qualified retirement plan and be credited with vesting service.
Eligibility: Prior to enactment of the SECURE Act, the Internal Revenue Code, and associated regulations, permitted an Employer to establish and maintain a requirement that an employee must complete 1,000 of hours of service in a twelve-month period in order to be eligible to participate in the Plan and that an employer may require 1,000 hours of service in a twelve-month period in order to be credited with a year of service for vesting purposes.
Section 112 of the SECURE Act, effective for plan years beginning after December 31, 2020, establishes that the period of service for eligibility may not extend beyond the first period of three consecutive twelve-month periods during each of which the employee has completed at least 500 hours of service. Please note that this does not require you to allow long-term, part-time employees to participate in the matching or employer contribution component of the Plan (if one exists) unless they satisfy the pre-SECURE Act eligibility criteria. In addition, these new rules do not apply to excluded employees covered by a Collective Bargaining Agreement if their retirement benefits were a subject of good faith bargaining. Likewise, employees who have not attained age 21 by the end of the third year of the period may continue to be excluded.
Entry Date: The Entry Date for an employee who becomes eligible because of this expanded eligibility requirement must be no later than the earlier of the first day of the plan year after satisfying the requirements or the date 6 months after satisfying the requirements.
Vesting: While an employer is not required to provide eligible long-term, part-time employees with a right to participate in matching or discretionary contributions, if an employer chooses to provide these contributions to the long-term, part-time employees, the required hours of service to receive vesting credit are reduced from 1,000 to 500. Further, the employee must be credited with vesting service for all years in which the employee performed 500 or more hours of service. Because the new 500 hour rule applies only to employees that achieved eligibility solely due to their long-term, part-time status, this may result in two different vesting crediting rules if the service requirement is not reduced for other participants.
Discrimination Testing: While the eligibility rules have been loosened, plans are not required to include long-term, part-time employees in their non-discrimination (ADP and top-heavy) testing.
Effective Dates: For purposes of the new eligibility rules, twelve-month periods beginning before January 1, 2021, need not taken into account. However, with respect to the new vesting rules, generally, all periods of service – even those prior to January 1, 2021 – must be considered when calculating the participant’s credited years of service for vesting. There are a few exceptions to this “look back” for vesting service including years of service before the employee attained age 18 and years of service before the plan was established (if the plan provides for those exclusions). While plans must be in operational compliance by January 1, 2021, the deadline for plan amendment is the first plan year beginning on or after January 1, 2022.
Items to Consider: Below are some issues or items that you may want to review as a result of these changes:
- Will your plan administration and hours of service tracking (internal or TPA) be updated as of January 1, 2021 in order to comply with the new rules?
- If you have an employer contribution component (matching or otherwise), do you wish to expand eligibility for those components also?
- Do you need to update your New Hire materials and communications?
- Do you need to update your recruiting materials and communications?
- Will the number of these new eligible employees result in you maintaining a Plan of 100+ participants?If so your plan may now require obtain an independent qualified auditors report to accompany your annual 5500 report.
- With more part-time employees potentially participating, it is likely that there may be a larger number of small balances in the Plan. This may result in increasing budgets for plan communications, and locating missing participants.
Stay Tuned for Possible Updates: On October 27, 2020, the House Ways and Means Committee released the Securing a Strong Retirement Act bill. This bi-partisan bill would, among other things, further modify the rules for long-term, part-time employees by reducing the consecutive twelve-month measurement period described above from three years to two years.
For additional information on how the SECURE Act long-term, part-time employee rules affect your plan, please contact a member of the Polsinelli Employee Benefits and Executive Compensation practice group, including one of the authors listed above.