In late December 2019, the SECURE Act became law and made significant changes to several longstanding retirement plan rules. The coronavirus-related pandemic has overshadowed the SECURE Act changes since early last year.
As employers begin to focus on the SECURE Act requirements, one change has confused employers who have part-time employees. Guidance issued by the IRS last September has added to the confusion.
The 401k plan eligibility rules have for many years permitted employers to exclude employees from making their own 401k payroll-deducted deferral contributions and receiving employer contributions until they complete a year of employment with at least 1,000 hours of service. Employers could relax this waiting period for employee and/or employer contributions.
This maximum waiting period for eligibility to make employee 401k deferral contributions was modified by the SECURE Act. Now, beginning with plan years that start in 2024, an employer cannot require part-time employees to complete more than 3 consecutive 12-month periods with at least 500 hours of service. Of course, if the 1-year-1,000-hour requirement is satisfied first, the waiting period is satisfied earlier.
The law specifically provides that periods before January 1, 2021 do not have to be counted for the long-term part-time employees, to determine whether the 3-year-500-hour requirement has been satisfied for eligibility purposes. Therefore, employers should be recording hours for all employees, including potential long-term part-time employees, beginning in 2021. (When ACSI requests that a client provide annual census information so that ACSI can perform our TPA compliance and administrative services, include the hours for all employees and ACSI will monitor eligibility for the long-term part-time employees.)
The 401k eligibility changes seem to allow an employer to have, under the 401k Plan, excluded categories of employees who cannot make deferrals even if they satisfy the 3-year-500-hour-eligibility-threshold. (For example, interns, law clerks, substitute teachers, etc.) However, it is possible that future IRS guidance may preclude the employer from excluding any employees, who meet the 3-year-500-hour-eligibility-threshold, from being able to make employee 401k deferrals. In other words, we would not be surprised if the IRS requires that all employees must be eligible to contribute if they satisfy the 3-year-500-hour-eligibility-threshold, even if they are in excluded categories.
Why do we believe that is possible? Because the IRS has already taken an expansive approach to interpreting the law changes.
How has the IRS done so? Another provision of the law requires that, if the employer makes long-term part-time employees eligible for employer contributions, or if the employee becomes eligible by completing the 1-year-1,000-hour eligibility requirement, then vesting in employer contributions will include vesting years as a part-time employee based on 500 hours per year, rather than the typical 1,000 hours. However, the IRS gave an expansive interpretation of the law in guidance issued a few months ago, and interpreted the law change to require vesting years to be credited for all periods of employment, including periods before 2021. This expansive interpretation of the law is an indicator that future IRS guidance may favor participation by long-term part-time employees.
ACSI (www.acsi-ny.com or firstname.lastname@example.org) is available to help you learn more about the long-term part-time employee rules.