Part-time employees are often ineligible for any company-sponsored benefits. However, the Internal Revenue Service (IRS) does not allow us to exclude part-time employees as a group if those employees otherwise satisfy the eligibility conditions of your plan. To further complicate this matter, The SECURE Act was officially enacted on January 1, 2020, with the pandemic following quickly on its heels. Businesses focused on the impact COVID-19 would have or had on its employees and its livelihood, causing some features of the SECURE Act to be overlooked or set aside for review later. Fast forward three years later. SECURE Act 2.0 was signed into law December 29, 2022, adding a layer of complexity for years 2024 and 2025.
Before the enactment of the SECURE Act, employers could design their 401(k) Plan to exclude employees who worked fewer than 1000 hours during the plan year or who were under the age of 21. This hours’ requirement prevented many long-term, part-time employees from joining their employer’s 401(k) Plan. The SECURE Act changed all that -- starting in the year 2024, employers who offer a 401(k) Plan must permit eligible long-term, part time employees (LT-PT) to contribute to the plan. Non-union part time employees who work between 500 and 999 hours in each of the previous three consecutive years (so for 2024, focus on years 2021, 2022 and 2023) must be permitted to contribute to the 401(k) plan if they are at least age 21 by the end of the 3-year period. To complicate matters, SECURE Act 2.0 changed the three consecutive year rule to two consecutive years for plan years beginning after December 31, 2024.
Note that this applies only to employee contributions. It does not require employers to make employer contributions or void any “1000-hour” work rule for these LT-PT employees if the “1000-hour” rule is present in your plan. Additionally, these LT-PT employees are not included in the Average Deferral Percentage Test (ADP) so testing will not be an issue.
