SECURE Act Gives 401(k) Relief to Part-Timers

By Ian Berger, JD
IRA Analyst
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Part-time employees in companies with 401(k) plans won a big victory when the SECURE Act was signed into law on December 20, 2019.

Before the SECURE Act, 401(k) plans could exclude employees if they did not work at least 1,000 hours of service in a 12-month period or were under age 21. These rules have prevented many long-term part-time employees from the chance to save in 401(k) plans.

The SECURE Act provides relief beginning with the first plan year after December 31, 2020 (for most plans, January 1, 2021). Any employee who has worked at least 500 hours in three consecutive years and is age 21 or older by the end of the three-year period must be allowed to start making elective deferrals. However, years beginning before January 1, 2021 do not have to be counted for purposes of meeting the three-consecutive-year rule.

Example: Assume Zoe starts part-time employment with Company A on January 1, 2019, when she is age 18. Company A has a 401(k) plan with a calendar year plan year. Before the SECURE Act, Company A required employees to attain age 21 and complete at least 1,000 hours in a 12-month period before becoming eligible to make elective deferrals. Zoe’s hours with Company A are as follows:

               Year                             Age                                   Hours

                2019                              18                                     750

                2020                              19                                     850

                2021                              20                                     800

                2022                              21                                     925

                2023                              22                                     550

Because of the new law, Zoe must be allowed to start making elective deferrals under Company A’s plan on January 1, 2024. That’s because she will have three consecutive years (2021, 2022 and 2023) with at least 500 hours of service and will be age 21 or older by December 31, 2023. Her service in 2019 and 2020 is not taken into account.

The new rule only applies for purposes of eligibility for elective deferrals. It does not require employers to make matching contributions or other employer contributions for part-timers who become eligible via the 500-hour rule.

Of course, employers are free to apply more liberal eligibility rules for their 401(k) plan. The new 500-hour rule is only a minimum eligibility rule. Also, keep in mind that the new rule doesn’t replace the pre-SECURE Act 1,000-hour/age 21 rule if that rule allows an employee to participate earlier than under the new rule.

Example: Assume that, in the above example, Zoe was age 21 when she began employment with Company A and had 1,100 hours of service (instead of 800) in 2021. Under the pre-SECURE Act eligibility rules that are still in effect, she must be allowed to start making elective deferrals on January 1, 2022.

The SECURE Act 500-hour rule does not apply to collectively-bargained 401(k) plans.