This continues our series of posts regarding the IRS guidance on the SECURE Act. As discussed in our article earlier this year, the SECURE Act changed the eligibility and vesting requirements an employer can use with regards to part-time workers in its 401(k) plan. Earlier this month, the IRS issued Notice 2020-68, which has provided further guidance on this topic. If your plan excludes part-time employees from participating or from accruing vesting service, you will want to read this post closely.
Eligibility requirements can be used by an employer to delay or restrict employee participation in its 401(k) plan, but these requirements are subject to limitations. Prior to the SECURE Act, an employer could not enforce a period of service eligibility requirements that extended past the later of the employee’s (a) completion of a 12-month period during which the employee has at least 1,000 hours of service, or (b) attainment of age 21.
The SECURE Act added another limitation for long-term, part-time employees. Employees that complete 3 consecutive 12-month periods with at least 500 hours of service in each period can no longer be excluded from participation in an employer’s 401(k) plan (as long as the employee has reached the age of 21 by the end of the 3-year period). The IRS clarified that, for eligibility purposes, 12-month periods beginning before January 1, 2021 are not taken into account. Although this means the earliest that an employer will be required to enroll a part-time employee due to this provision is in 2024, an employer that excludes part-time employees from participating in its plan will have to begin tracking and retaining records for hours worked in periods beginning in January 2021.
The SECURE Act and Notice were also clear that the new long-term, part time eligibility requirements applied only to elective deferrals, not employer contributions (i.e., employers that exclude part-time employees from employer contributions can continue to exclude long-term, part time employees). But employer contributions didn’t miss out on the guidance completely. Long-term, part-time employees (employees with 3 consecutive periods of service with 500 or more hours) must be credited with a year of vesting service for employer contributions for each year that an employee completes 500 hours of service. This applies to both long-term, part time employees and long-term, part time employees that subsequently complete a 12-month period with 1,000 hours of service.
Lastly, the IRS has clarified through its most recent guidance that 12-month periods before January 1, 2021 are not excluded for purposes of determining years of vesting service (i.e., plans must retroactively apply the provision to the best of their abilities). The retroactive application will obviously raise issues for plans that do not have records of hours of service for part-time employees in prior years, but it also makes it crystal clear that plans with annual hourly vesting requirements for employer contributions should immediately begin tracking hours and should be applying these new vesting rules.
If you have any questions regarding the eligibility or vesting requirements of part-time employees, contact any member of Graydon’s employee benefits team. We will continue to provide updates on these topics as further guidance is issued.
