Thursday, June 16, 2022

Are Part Time Employees Eligible For 401k

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Erisa Connection: Including Long

Congress act could offer 401K to small businesses, part-time workers

VOL 7: LONG-TERM PART-TIME EMPLOYEES

Historically, qualified plan rules did not require part-time workers be eligible to participate in an employers retirement plan. By defining long-term part-time employees, the SECURE Act changed the rules that permitted 401 plans to exclude individuals who worked less than 1,000 hours in the plan year.

Contributions Or Benefits Must Not Discriminate

Under the plan, contributions or benefits must not discriminate in favor of highly compensated employees. Generally, employees with compensation of $135,000 or more from the employer in the prior year are considered highly compensated for 2022 . In order to satisfy this requirement with regard to elective deferrals and employer matching contributions, 401 plans may provide minimum employer contributions or meet the Actual Deferral Percentage and Actual Contribution Percentage tests.

Example Of Participation And Vesting Eligibility

In 2020, Mary worked 700 hours. At that time, you excluded Mary from your 401 plan because she did not work at least 1,000 hours in a 12-month period and was not at least 21 years old.

But pursuant to the SECURE Act, you must start tracking Marys time in 2021, through to 2023 to determine whether shes eligible to participate in your 401 plan in 2024.

Lets say Mary works the following hours from 2020 to 2023:

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Based on the above information, you must include Mary in your 401 plan starting 2024, because she turns 21 before the end of the previous 3-year period and works between 500 and 999 hours during each of those 3 years. As the IRS stated, with regard to participation, you would not count Marys work hours for 2020.

In terms of vesting, any contributions Mary makes to her 401 as a part-time employee is immediately vested, meaning the funds immediately belong to Mary 100% at the time of payroll deduction. However, you require that employees work at least 1,000 hours for the year, in order to qualify for matching contributions. So long as Mary keeps working less than 1,000 hours in a year, you do not have to make matching contributions to her 401 account.

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Avoid Running Multiple 401 Eligibility Cycles If Possible

Dual eligibility cycles can help businesses tailor their plans to better fit their employee situation, but they also effectively double the work you need to do to track everything.

Often, businesses may also have different eligibility requirements for different types of employees. Full-time employees, for example, may be offered participation after only a month, while part-time employees may be required to wait a year. Like with dual eligibility cycles, this means keeping track of two different eligibility systems and enrollment schedules, which means pulling at least 2 reports every time a plan entry date approaches.

When Does Vesting Eligibility Begin

New IRS guidance reminds employers about new long

IRS Notice 2020-68 clarifies that employers can disregard the 12-month periods before 2021 when determining 401 participation eligibility, but not when determining years of vesting service for employer contributions. So, when figuring vesting eligibility based on years of service, you must consider the employees total employment meaning all years of service.

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May Not Have Impact Until 2024

Unlike certain other provisions of the Secure Act, this one will take a while to come into effect. The text states that it shall apply to plan years beginning after December 31, 2020 and that for the purposes of meeting the 3 years of service requirement, 12-month periods beginning before January 1, 2021, shall not be taken into account. Unfortunately, this suggests that not only will the legislation not come into force until 2021 in most cases, but then as a part-time employee working between 500 and 1,000 hours, you may still have to wait effectively a further 3 years to qualify. Therefore, unless employers chose to act more quickly than the law requires, the impact may not felt until 2024 when some part-time workers will have qualified as long-term under the new rules.

Eligibility Requirements For Enrollment

When it comes to allowing employees into the plan, 401 eligibility requirements are allowed to be as lenient as you wish. However, the regulations of the Internal Revenue Code limit how restrictive plan eligibility can be. In general, there are two types of requirements that plans can impose on their employees:

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K Eligibility Is Important

I beat this drum a lot, but there is no such thing as one-size-fits-all 401k plan. Choosing the right mix of 401k features during the plan design process can help a company meet their 401k goals at the lowest annual expense.

Some of the most consequential decisions 401k fiduciaries make during the plan design process relate to employee eligibility. When eligibility requirements are too liberal, plan expenses can explode and day-to-day administration is made unnecessarily complex. When they are too strict, prospective employees might look elsewhere for employment. 401k fiduciaries should understand their options to make the right eligibility decisions for their 401k plan.

About Eric Droblyen

Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the companys operations and service delivery.

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Are Part Time Employee Eligible For 401k

Can I Qualify for a 401K for my LLC if I Have a Part-Time Employee
  • Answered October 11, 2019 – Cashier/Customer Service – Mount Pleasant, MI

    Part time employees are not eligible for 401k

    Upvote

  • Answered October 7, 2019 – Crew Member – North Little Rock, AR

    No they not eligible for 401k

    Upvote

  • Answered September 7, 2019 – McDonalds Crew Member – Westminster, CO

    Part-time is not eligible for 401k.

    Upvote

  • Answered August 16, 2019 – Production Worker – Algonac, MI

    I did not enjoy my time there at all.

    Upvote

  • Answered August 6, 2019 – Cashier and Customer Service – Gilbert, WV

    Yes, part time employees are eligible for 401k.

    Upvote

Help job seekers learn about the company by being objective and to the point.

Your answer will be posted publicly. Please don’t submit any personal information.

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Times They Are A Changin’

The new law is called the SECURE Act, and it does include a series of provisions that seek to expand access to workplace retirement plans to so-called long-term, part-time employees. It does this by making the most restrictive eligibility requirements less restrictive, starting for plan years that begin after December 31, 2020. Heres what those requirements boil down to:

  • Attainment of age 21, and
  • 3 consecutive 12-month periods working at least 500 hours of service in each of those periods .

After long-term, part-time employees satisfy these criteria, you must allow them to enter the plan for 401 deferral purposes with entry on a semi-annual basis. Note that this provision does not apply to employees who are part of a collective bargaining situation.

With the threat of the sky falling a bit less imminent, heres a little more good news. Since the provision is not effective until plan years that begin in 2021 or later, the first opportunity for long-term, part-time employees to enter a plan under this new requirement is Thats right employees would need to work at least 500 hours in 2021, 2022, and 2023 in order to enter the plan January 1, 2024.

Lets see if we can make you feel even better! Once these employees enter the plan, they are only eligible to make 401 deferrals and not for any employer contributions unless or until they satisfy the regular eligibility requirements contained in your specific plan document .

Eligibility: When To Let Employees Join Your 401 Plan

Plan Design | 401 Studies

    During the 401k plan design process, we get a lot of questions from small business 401k fiduciaries about employee eligibility.

    They want to know when they should let new employees into their 401k plan and their options for keeping certain employees generally the ones that wont participate out.

    These are important questions to answer correctly. Who 401k fiduciaries let into their plan can have a dramatic effect on the plans cost, ease of administration, and perceived value to existing or prospective employees.

    401k fiduciaries should understand their eligibility options to best match them to company 401k plan goals.

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    Are You Tracking Part

    Through the SECURE Act, employers with a 401 plan must allow eligible long-term, part-time employees to contribute to the plan.

    No account yet? Register

    Allowing your long-term, part-time employees to join your 401 plan is a smart recruiting strategy. Its also a key component of the Setting Every Community Up for Retirement Enhancement Act.

    Officially enacted on January 1, 2020, the SECURE Act aims to expand retirement plan access to Americans, by incentivizing small businesses to offer 401 plans. For instance, the SECURE Act provides tax credits to small businesses that start a qualified retirement plan plus offers a new type of multiple employer plan that makes it easier for small, unrelated businesses to pool together and establish a single retirement plan.

    Additionally, the SECURE Act contains a vital compliance requirement: starting in 2024, employers with a 401 plan must permit eligible long-term, part-time employees to contribute to the plan. While this may seem like a long way off, applicable employers must start tracking their part-time employees hours in 2021.

    Plan Sponsorsdo You Need To Start Tracking Hours For Your Part

    401(k) â NBC New York

    At the end of 2019, President Donald Trump signed into law the Setting Every Community Up for Retirement Enhancement Act, which included a number of changes to employer-sponsored retirement plans. One change involved expanding the ability of long-term, part-time employees to make 401 deferral contributions. While this change becomes effective in 2024, employers that apply an eligibility service requirement to determine whether employees can contribute to a 401 plan must begin tracking hours of service for part-time employees beginning January 1, 2021.

    Background

    Generally speaking, a 401 plan cannot exclude employees who are at least 21 years of age and have completed 1 year of service with their employers. One year of service is commonly defined as a 12-month period during which an employee has completed 1,000 hours of service, commencing on the employees first day of employment. Plan sponsors may include an age and/or hours of service requirement on 401 plan participation, or they may decide not to impose such conditions. This flexibility allows plan sponsors to design their 401 plans around the specific demographics of their workforce. However, the Internal Revenue Service has the authority to revoke a retirement plans tax-qualified status if the plan imposes an age requirement that exceeds 21 or a service requirement that requires more than 1,000 hours of service in a year to be eligible for the plan.

    Counting Hours of Service

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    Distribution Rules Must Be Followed

    Generally, distributions cannot be made until a “distributable event” occurs. A “distributable event” is an event that allows distribution of a participant’s plan benefit and includes the following situations:

    • The employee dies, becomes disabled, or otherwise has a severance from employment.
    • The plan ends and no other defined contribution plan is established or continued.
    • The employee reaches age 59½ or suffers a financial hardship.

    See When can a plan distribute benefits?

    Benefit payment must begin when required. Unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods:

    • The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan.
    • The plan year which includes the 10th anniversary of the year in which the participant began participating in the plan.
    • The plan year in which the participant terminates service with the employer.

    Loan secured by benefits. If survivor benefits are required for a spouse under a plan, the spouse must consent to a loan that uses the participant’s account balance as security.

    Choosing 401k Eligibility Terms

    Company goals, employee demographics and plan features are all factors 401k fiduciaries should consider when choosing eligibility terms for their plan. More specific considerations include:

    • Companies with high employee turnover that want to keep transient employees off their plan choose longer service requirements.
    • Companies that want to minimize the number of part-time or seasonal employees in their plan define a year of service using the counting hours method
    • Companies that want their 401k plan to help recruit top employee talent choose shorter service requirements.
    • Companies that want their 401k plan to help employees save as early as possible for retirement choose no service requirements at all.
    • Companies that make 100% immediately vested employer contributions may prefer longer service requirements since vested contributions are not forfeitable upon an employees separation from service.

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    Is It Worth It

    So as a part-time employee you may already work over 1,000 hours per year and this change wont impact you. However, if you work between 500 and 1,000 hours on a long-term basis and youre over 21, then this change may well give you another option for retirement saving. Unfortunately, 401 contribution matching can be a great employee benefit, and employers may not offer it under the new rules.

    However, there is a lot to be said for making saving automatic so you dont have to think about it, and having a small amount of money regularly come out of your paycheck to help fund your retirement can be a smart way to get on track with retirement saving. This is not a major change, and the impact will be delayed and limited. Still its a step in the right direction that will help some part-time workers and may lead to further improvements with pension plans in future. If you are impacted by this change and want to kick off a regular savings habit, then this could be the chance you need, though unfortunately the impact wont be felt for several years unless employers chose to move sooner. In the interim, you may want to consider an IRA to meet your retirement savings goals.

    Secure Act Series: 401 Plan Eligibility For Part

    Self-Directed Solo 401k Plan Eligibility Requirements

    One of the primary objectives of the SECURE Act of 2019 is to increase access to retirement plans at work for more individuals. To accomplish this goal, lawmakers enhanced employer incentives for establishing workplace retirement plans and changed eligibility rules to ensure that long-term, part-time employees are allowed to defer a portion of their paychecks into a 401 plan.

    Beginning January 1, 2021, employers must track part-time employees hours of service for purposes of calculating eligibility to participate in a 401 plan. This tracking may require changes to payroll processes such as including these employees in data files provided to the plan recordkeeper. While these changes needed to track part-time employees must begin in 2021, employers will have three years before these employees will be eligible to defer into the plan under the new rules. This gives employers time to evaluate how adding part-time employees to the plan will affect plan operations, nondiscrimination testing, and plan costs.

    In the meantime, you may want to work with your financial advisor to review your objectives for your retirement plan and evaluate how these new rules may affect those objectives . Your recordkeeper and/or third party administration can assist you in complying with the new tracking requirements.

    Following is a summary of the changes made by the SECURE Act:

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    Contributions And Allocations Are Limited

    Contributions to a 401 plan must not exceed certain limits described in the Internal Revenue Code. The limits apply to the total amount of employer contributions, employee elective deferrals and forfeitures credited to the participant’s account during the year. See 401 and Profit-Sharing Plan Contribution Limits.

    How Much Money You Should Have Saved At Every Age

    How much should you aim to put aside when saving for retirement? Investment company Fidelity advises building a nest egg that will replace at least 45% of your pre-retirement income. This assumes your expenses drop in retirement and that Social Security supplements a significant part of your income. The National Institute on Retirement estimates Security Social Security benefits only replace about 40% of pre-retirement income, so if you don’t expect your expenses to decline significantly, you may want to save more. In fact, some experts suggest saving enough to replace 70% to 90% of your pre-retirement income.

    Fidelity recommends putting 15% of your gross income into retirement accounts, half of which should be invested in stocks. Here’s what Fidelity says you should have saved:

      These suggestions are only averages, however, and you may decide to save more or less than this depending on your current age and the lifestyle you want in retirement. If your vision of retirement involves puttering around in your workshop, gardening and visiting the grandkids, you won’t need to save as much as someone who wants to travel the world or collect classic cars. Paying down credit card debt, reducing your expenses and making a budget can help you put more of your paycheck toward retirement.

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      Elective Deferrals Must Be Limited

      In general, plans must limit 401 elective deferrals to the amount in effect under IRC section 402 for that particular year. The elective deferral limit is $20,500 in 2022 The limit is subject to cost-of-living adjustments. However, a 401 plan might also allow participants age 50 and older to make catch-up contributions in addition to the amounts contributed up to the regular 402 dollar limitation, provided those contributions satisfy the requirements of IRC section 414. These limits apply to the aggregate of all retirement plans in which the employee participates.

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