Long-Term Part-Time Employee 401(k) Elective Deferrals
The same IRS Notice (2020-68) that addresses Qualified Birth or Adoption Distributions (QBADs) also deals with how to handle the SECURE Act’s inclusion of long-term part-time employees and their eligibility for 401(k) plans.
Eligibility to Participate
For plan years beginning after Dec. 31, 2020, a 401(k) plan must allow any nonunion employee of the sponsoring employer (or other participating employer) to participate in making elective deferrals as of:
- The close of the first 12-consecutive month period during which the employee is credited with at least 1,000 hours of service or, if later, the employee’s attainment of age 21, or
- The close of the first period of three consecutive 12 months during which the employee is credited with at least 500 hours of service in each 12-month period or, if later, the employee’s attainment of age 21. (An employee who meets this three-year eligibility requirement is referred to as a “long-term part-time employee.”).
- No 12-month period before Jan. 1, 2021, is required to be considered for purposes of determining an employee’s eligibility to make elective deferrals to the 401(k) plan, but see the discussion below regarding vesting.
The SECURE Act does not require that long-term part-time employees be eligible to receive safe harbor contributions or other allocations of employer matching contributions or discretionary contributions. Long-term part-time employees also appear to be excludable for purposes of nondiscrimination and top-heavy requirements—but IRS guidance as to the specifics of these exclusions would be helpful.
Vesting in Employer Contributions
With respect to any employer contributions allocated to the plan account of a long-term part-time employee, the employee must be credited with one year of vesting service for each 12-month period during which the employee completes at least 500 hours of service. The Notice clarifies that all years of service, even years before 2021, must be considered for determining a long-term part-time employee’s vesting in any employer contributions allocated to that participant’s account, unless those years otherwise may be disregarded (e.g., years before the employee’s attainment of age 18, if so provided in the plan document).
Many employers were counting on only having to track part-time employee service on a going-forward basis after Jan. 1, 2021. However, this vesting service requirement likely adds a significant administrative burden on employers. While an employer always could be more generous in the application of service for vesting, that simply may not be possible. Employers presumably have employment records on hourly paid part-time employees that will enable them to determine whether such employees have actually been credited with 500 hours of service in all years since the employee’s start date, but collecting that data might seem to be a Sisyphean task. Alternatively, and for those jobs that are not paid hourly (e.g., part-time commissioned sale positions), an employer may want to explore whether the equivalency method of determining hours of service could be utilized (where, for example, a day is equivalent to 10 hours, a week is equivalent to 45 hours, a month is equivalent to 190 hours). However, using equivalencies results in more generous service crediting. In addition, an employer must make sure that the manner in which employees’ service is credited for all purposes under the plan cannot discriminate in favor of highly compensated employees. Nevertheless, the service crediting requirement would seem to impose a significant administrative burden on employers. It certainly would be helpful for more guidance to be issued on how service should and could be credited without creating an administrative headache for employers.