Getting Ready to Include Part-Time Employees in Retirement Plans

401(k) plan sponsors need to understand all the parts of the new requirement and, for some, the long-term effects on plan administration.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act—in lawmakers’ attempt to do as the name says—includes a mandatory requirement for 401(k) plan sponsors to allow long-term part-time employees to participate in the plan.

Specifically, Jessica Curtin, compliance analyst at Paychex in Rochester, New York, explains, if a part-time employee has worked at least 500 hours for three consecutive years and meets the minimum age requirement for eligibility to participate, he must be offered the opportunity to do so. This requirement goes into effect for plan years beginning after December 31, 2020, so employers have some time to prepare.

This doesn’t mean part-time employees have to be included in 401(k) plans for plan years starting in 2021; it means that is when employers must start counting hours for eligibility purposes. “The practical effect is that it won’t be until after 2023 that plan sponsors will have their first batch of long-term, part-time employees covered in their plans,” says Randall Tracht, partner with Morgan Lewis & Bockius LLP in Pittsburgh, Pennsylvania.

Lawmakers included provisions to avoid the negative effects that including a potentially large number of lower-income workers who may make smaller contributions could have on plans. For one, Curtin notes, plan sponsors may choose to allow part-time employees to share in employer contributions (of all types), but they are only required to allow part-time employee to make employee deferrals. “The law is not burdening employers with the costs of making additional employer contributions,” she says.

Second, plan sponsors do not have to include part-time employees in non-discrimination testing. “This includes actual deferral percentage [ADP], coverage and top heavy testing, so including part-time employees in the plan won’t do any damage to testing,” Curtin says.

Tracking Hours

Curtin adds that she anticipates plan sponsors will be tracking actual hours worked for part-time employees when determining eligibility because other methods—such as elapsed time—were not addressed in the SECURE Act.

However, Tracht says he thinks there will be interpretive guidance issued that fine tunes exactly how to count hours for eligibility, but, in large part, the statute leverages existing service-counting rules. “The existing rules related to counting hours for eligibility—as well as vesting—allow plan sponsors that are not tracking actual hours to use equivalencies,” he says. “My reading right now is that all those rules apply here.” An example of equivalencies is if an employee worked any time in a month, he is considered to have worked 190 hours for the month.

Curtin notes that tracking actual hours for part-time employees shouldn’t be difficult as the majority are paid on an hourly basis anyway.

Curtin says another component of the law is that if part-time employees do share in employer contributions, they will receive vesting credit for each year they worked 500 hours or more, rather than the 1,000 hours for full-time employees. Plan sponsors should pay attention to this because even if part-time employees do not share in employer contributions, if a part-time employee later becomes a full-time employee who is eligible for employer contributions, he will get vesting credit for previous years he worked 500 or more hours, starting with 2021.

The law did not address whether a full-time employee who shares in employer contributions would still share in those contributions if he later becomes a part-time employee. Tracht says this would depend on the terms of the plan and whether part-time employees are allowed to share in employer contributions in the first place. Curtin says most plans have a stipulation that an employee must work 1,000 hours or more to share in employer contributions, except in the case of the employer match.

To prepare, Tracht says plan sponsors need to work with their human resource information system (HRIS) providers and retirement plan recordkeepers to keep track of hours for a new subset of part-time employees. “Right now, for retirement plan purposes, they keep track of who works 1,000 hours and exclude the rest. Now, they will have to also keep track of part-time employees who work 500 hours or more,” he says.

Curtin notes that payroll providers, such as Paychex, can offer eligibility reporting. However, she adds, 401(k) plan sponsors are ultimately responsible for offering part-time employees the opportunity to participate in the plan, so they are ultimately responsible for the correct tracking of hours of service.

Thinking Long-Term

As with any new retirement plan legislation, the provision for including part-time employees will be included on a remedial amendment list (RAL) issued by the IRS, so plan sponsors do not have to worry about making sure their plan is amended until that happens, Tracht says.

He notes that many plan sponsors may not have part-time employees or may not have many. “As we’re starting to talk to employers about this, we’re getting the reaction from those who may not have many part-time employees that, whether long-term or not, they may extend participation to them all,” Tracht says.

But for some—such as retailers—the new mandate will create a heavier administrative burden. There are some long-term effects to consider.

“Some plan sponsors will have a larger number of employees to send enrollment materials to and communicate with,” he says. But, in addition, including part-time employees in 401(k)s likely will create a larger number of small balances upon participant termination. “Part-time employees won’t be able to contribute at a high level, and their balances will grow more slowly,” Tracht explains. “Plan sponsors will have more balances subject to forced cash-outs, and may have more missing participants and more uncashed checks.” He suggests plan sponsors reconsider their cash-out rules and procedures for locating missing participants.

Tracht adds that there may be higher turnover among part-time employees, making them a more difficult population to administer.

Rehire administration currently can be complicated; will new rules make it even more so?

“Staying in tune with news and any additional guidance is very important,” Curtin says. “There are a number of pieces of guidance requested from the IRS and Department of Labor [DOL] to clarify some rules in the new law. Plan sponsors should keep in touch with their providers.”