SECURE Act Expands Eligibility for 401(k) Deferrals

A December 27, 2019 post to this blog by Jon Nason provided an overview of the many changes affecting retirement plans made by the SECURE Act, which was enacted as part of the Further Consolidated Appropriations Act of 2020 on December 20, 2019.  Today’s post takes a deeper dive into one of the key changes.

Division O § 112 of the SECURE Act requires that 401(k) plans extend eligibility for making elective deferral contributions to certain long-term part-time employees.  Because this change is mandatory, it is important for employers to understand how it will affect their 401(k) plan as it modifies the “service” portion of the maximum age and service eligibility rules.

Currently, 401(k) plans may require an employee to attain age 21 and have 1,000 hours of service during a consecutive 12- month period in order to become eligible to participate in the plan.  The SECURE Act changes the service requirement so that employees who have at least 500 hours of service during each of three consecutive 12-month periods are eligible to participate in the elective deferral contribution portion of the plan.  The age requirement is not affected by the SECURE Act.

Expanded eligibility does not apply to employees whose employment is subject to a collective bargaining agreement.

Importantly, the SECURE Act expands the deferral eligibility without extending other related plan provisions to these long-term part-time employees.  They may be excluded from employer contributions, whether a matching or nonelective contribution, whether a safe harbor contribution or not.  They may be excluded from the nondiscrimination rules normally applicable to deferral contributions, such as the ADP, as well as the ACP minimum coverage safe harbor and QACA rules.  In addition, they may be excluded from the top heavy rules, so that if the plan is top heavy, the special top heavy contribution and vesting requirements need not apply to them.

Even though the SECURE Act does not require that employer contributions of any type be made for the long-term part-time employees, employer contributions are permitted.  If employer contributions are made and they are subject to a vesting schedule, a special vesting rule applies.    Under the special vesting rule, the participant must be credited with a year of vesting service for each 12-month period in which the employee has at least 500 hours of service.  In addition, 500 hours of service replaces 1,000 hours of service in applying the break-in-service rules.

The new expanded eligibility rules are effective for plan years beginning after December 31, 2020.  For calendar year plan years, this means that the hours of service for employees currently ineligible based on service must be tracked beginning with the 2021 plan year to determine if they reach the 500 hours of service level.  If they have 500 hours in each of the 2021, 2022, and 2023 plan years, then they will be allowed to make elective deferral contributions under the plan beginning with the 2024 plan year.  Service prior to the 2021 plan year is disregarded.

While no immediate action is needed, plan sponsors should begin to plan for how they will implement the change at both the payroll/data tracking level and in administering the 401(k) plan, and also review the plan to identify excluded classes of employees that could be tied to hours of service (e.g., temporary, part-time, and seasonal employees).

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