While we were all enjoying the Friday after Thanksgiving the Department of Treasury and the Internal Revenue Service issued a set of rules that could benefit a small (probably) number of employees by making them eligible to participate in an employer’s 401K defined contribution plan.

Only a real retirement benefits maven would appreciate this development. The new rules were promulgated pursuant to the SECURE Act (2019 and 2022) and will require employers with a 401K benefit to modify their plans so that current part-time employees working over 500 hours per year for a period of two years and employees starting next year after three years may also be participants in the employer’s 401K plan.

Most employers with a 401K plan have general 401K qualification rules that state an employee is eligible to participate in the company 401K plan if they 1. Work 1000 hours in a year; 2. Work a full year for the employer, and 3. Are at least 21 years of age.

The almost universal “1000-hour rule” kept many longer term, but part time employees, one way or another, from qualifying to participate for the benefit. Not so much anymore.

Going forward qualified retirement plans may not, as a term of that plan, exclude employees from becoming eligible to participate until they work at least 1000 hours in a year. Beginning in 2024, employers must permit part-time employees who work at least 500 hours over two consecutive years to be able to contribute to a 401K plan and if the part-time employee has worked for over two consecutive years, they must be allowed to contribute beginning in 2024. This is now the definition of “long term part-time” employee – a new classification of employee for defined contribution retirement plan purposes.

Please note however, employers will not be required to make employer contributions (either matching or non-elective contributions) to the employee unless they choose to.

There are permissible exclusions to doing this. The rules allow certain employees that are in a collective bargaining unit and those that are nonresident aliens who do not receive income to be excluded from the plan. Another noted exclusion is employees that are LTPT that are members of a job classification that is not based upon age or service and who have been excluded under the terms of the plan. Conditions apply in this case though.

A LTPT is not an employee that became eligible for a 401K plan because of having completed any other service requirement or an employee that is otherwise eligible to immediately participate in the plan. One other exclusion is employees that become eligible to participate in a plan under another method such as what is called an elapsed time method.

An elapsed time qualification method works by having a period of employment such as one year without regard to the number of hours worked in that year. One other approach to qualification criteria that would work around the rule is the Hours Equivalency method. This method allows the employer to credit hours of service. The rules provide an example of this where 190 hours is credited for qualification for each month an employee would be required to be credited for one month of service.

Under these new rules, the 12-month period to start qualification begins on the employee’s date of hire.

If a long term part-time employee works less than 500 hours in a 12-month period, they will not cease to be eligible if they subsequently work less than 500 hours in another 12-month period.

The new rules also address LTPT employee vesting and how this classification impacts the nondiscrimination, coverage testing, and top-heaving testing required of defined contribution plans.

Employers with 401K plans and have some part-time employees as defined should check with the plan administrators to ensure their plans are updated for this new group of employee participants.

Source: Seyfarth Shaw. The Long Wait for the Long-Term Part-Time Guidance is Over (11/28/2023)