By Marylou Fabbo, Esq. and Wendy L. Grabel, Esq.
Effective January 2024, long-term, part-time employees will become eligible to contribute pre-tax earnings to 401(k) plans. This is a change from current rules which give employers the option to limit plan participation to employees who have completed a year of service (usually the preceding 12 months), working 1,000 hours within that 12-month period. The new rule gives these employees the right to make their own voluntary, salary deferral contributions into their employer’s 401(k) plans. As of 2024, only 401(k) plans will be subject to the part-time rule. The rule does not apply to employees covered by a collective bargaining agreement, independent contractors, and other ineligible workers. As a result of this new rule, eligible part-timers must be invited to enroll in their employers’ 401(k) plan during the plan’s enrollment periods.
Which Part-Time Employees Will Be Eligible? To be eligible, part-time employees must have three years of service, with at least 500 hours of service each year. They must also be at least 21 years old.
When Can Part-Time Employees Make Plan Contributions? Any regular employee who has satisfied the annual 500-hour threshold since January 1, 2021, will be eligible to begin deferrals as of the plan year that begins in 2024. That date will be January 1, 2024, for plans with a calendar plan year (and July 1, 2024, for plan years that begin in July). Part-time employees who meet the eligibility requirements must be permitted to start making plan deferral contributionsno later than the first day of the plan year after they satisfy the eligibility requirements, or 6 months after they satisfy those requirements, whichever comes first.
Are Employer Matching Contributions Required? No. Employer matching contributions are not mandatory. The new part-time rule concerns onlyvoluntary, employee salary deferrals. All of a plan’s existing eligibility rules regarding employer contributions won’t change as a result of the new rule. Even “safe harbor” plans in which employers make matching contributions are notrequired to make matches for part-timers, if the plan has a 1,000-hour service requirement for employer contributions, and the part-time employee fails to meet that threshold. Employers with auto-enrollment features in their 401(k)s may choose to extend auto-enrollment to the part-timer participants, but are not obliged to do so. Employers may also exclude the part-time participants from nondiscrimination and top heavy testing.
When Does a Part-Time Employee Vest? Part-timers’ service was credited for vesting beginning in calendar year 2021. As of that year, part-time employees are entitled to a year of vesting credit for any 12-month “vesting computational period” during which they performed 500 hours of service. For those employees, service beforecalendar 2021 will notbe counted for vesting or eligibility purposes if they failed to perform 1,000 hours of service during the relevant computational period. If the employees later become full-time employees, then any full “Year of Vesting Service” with which they had been credited will carry over.
What’s Coming Down the Road? Part-time employees will be granted earlier access to 401(k) deferral contributions beginning in 2025. Employees will become eligible to make deferrals after only two consecutive 12-month periods in which they performed 500 hours of service. That same year, part-timers’ eligibility for deferrals will also become effective for 403(b) plans. All other requirements that are described above will continue, unchanged.
What Should an Employer Do Now? Employers should make certain that eligible part-timers receive their Plan enrollment materials. Some of the terms used in this blog, such as “hours of service,” are terms defined by the federal statute known as ERISA. Employers should work with their plan administrators or benefits counsel for more information, and to modify their plan administration to comply with the new rule. The IRS explanation of the new rule can be found here: IRS Explanation of part-time rule. See first paragraph in “Effective in 2021” section.