Many 401(k) plans require employees to work for one year with 1,000 hours of service in order to be eligible to make elective salary deferrals. Because many part-time employees do not meet the 1,000 hour threshold, many of them never become eligible to make elective deferrals. Congress determined that this type of exclusion was detrimental to part-time employee retirement security. Thus, in the Secure Act of 2019, Congress added a provision requiring that otherwise eligible employees who have completed at least 500 hours of service each year for three consecutive years and who are age 21 or older be permitted to make elective deferrals. Starting with the 2021 plan year, employees with 500 hours of service or more for 2021, 2022, and 2023 must be eligible to make elective deferrals effective January 1, 2024. Employers are not required to make matching and safe harbor contributions for these employees. The Secure 2.0 Act of 2022 goes further and reduces the three year review period to just two years starting for the 2025 plan year. It also extends the rule to 403(b) plans.
As a result of these changes, employers with 401(k) plans that otherwise exclude part-time employees from participating should start reviewing the hours worked by part-time employees over the last three years so as to avoid any improper exclusions in 2024 and beyond. 403(b) plans should also start monitoring part-time employees. Improper exclusions could raise plan qualification issues.
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