Tracking Part-Timers’ Hours
Art by Nadja Zinnecker
The Setting Every Community Up for Retirement Enhancement (SECURE) Act demands that employers maintaining a 401(k) plan have a dual-eligibility requirement, starting this coming January 1, to enable part-time workers to join the retirement plan. Under this requirement, an employee must complete either one year of service, with at least 1,000 hours worked, or three consecutive years, with at least 500 hours worked in each.
2021 is when employers must start counting hours for eligibility purposes. Plan sponsors may choose to allow part-timers to share in any type of employer contribution, but they are only required to let those employees make deferrals. The SECURE Act also says plan sponsors “may elect to exclude” these employees from nondiscrimination and coverage testing, as well as from the application of top-heavy rules.
Most part-time employees are paid by the hour, so the employer should have records of the hours worked, says Patricia Martin, an attorney with Husch Blackwell. For employees who are paid on a daily or a piecework basis, the employer may have to use the “equivalencies” under Department of Labor (DOL) regulations. “For example, if an employer does not keep track of actual hours worked, it would give 10 hours of service for each day on which the employee worked,” Martin explains.
She adds that some employers may choose to just make everyone eligible to make elective deferrals, regardless of hours worked.
However, counting hours for vesting gets even more complex, says David Swallow, managing director of consultant relations at TIAA. He explains that newly eligible part-time employees may get vesting credit for years prior to reaching eligibility.
Lisa A. Tavares, a benefits and executive compensation partner at Venable LLP in Washington, D.C., and a former attorney with the IRS Office of Chief Counsel, says plan sponsors have to give vesting credit to newly eligible part-time employees for all years, even prior to 2021. “They haven’t been counting hours because these employees were excluded from the plan, but now they’ll have to go back and figure out hours for prior years,” she says.
This is where the use of equivalencies may be beneficial. Existing IRS rules related to counting hours for eligibility—as well as for vesting—allow plan sponsors that do not track actual hours to use several equivalency methods, Tavares points out. In addition to 10 hours credited for each day, plan sponsors may credit employees with 45 hours for each week worked, 95 hours for each semi-monthly payroll period or 190 hours for each month worked. “This is a more generous way to calculate eligibility and vesting credit, so some may not want to do it, but it’s administratively easier,” Tavares says.
Depending on the industry, with the new SECURE Act eligibility requirement, plan sponsors may end up including all employees in their plan, Tavares says. But whether to offer access to the 401(k) could be a bigger issue for retail employers, “I’d think employers in the retail industry would want to count hours for employees because they may still have many people who work less than 500 hours,” she says. “So, I’d think they wouldn’t want to just include everyone.”
Small Account Balances
There will be other administrative challenges to work through, Swallow says. For industries where turnover of part-time employees is an issue, there will be more small account balances to deal with, and the issue of missing participants could increase. Swallow says plan sponsors should redetermine what solution for handling small balances—i.e., retain, automatically cash out or automatically roll over—would be best for their plan. Plus, now is a good time to review their process, if they have one, for finding missing participants, he says.
Rick Skelly, a client service executive in the retirement services division of Marsh & McLennan Insurance Agency, says, if small balances are forced out of the plan in a timely manner after the holder separates from service, missing participants should not become a bigger issue.
According to Swallow, the expansion of 401(k)s to part-time workers underscores the reality that defined contribution (DC) plans will be the primary retirement savings vehicle for employees to depend on for many years to come.
The Old Rules for Part-Time Workers
Previously,
401(k) plans could exclude part-time employees working fewer than 1,000 hours per year.
A plan could impose a waiting period of up to one year before an individual became eligible to participate.
For plans that defined “years of service” based upon an “hours-of-service” definition, one year meant 1,000 hours.
403(b) plans already follow a universal availability rule, so the new 500-hour rule will not affect them.
A plan could impose a waiting period of up to one year before an individual became eligible to participate.
Previously,
401(k) plans could exclude part-time employees working fewer than 1,000 hours per year.
For plans that defined “years of service” based upon an “hours-of-service” definition, one year meant 1,000 hours.
403(b) plans already follow a universal availability rule, so the new 500-hour rule will not affect them.
Previously,
401(k) plans could exclude part-time employees working fewer than 1,000 hours per year.
A plan could impose a waiting period of up to one year before an individual became eligible to participate.
For plans that defined “years of service” based upon an “hours-of-service” definition, one year meant 1,000 hours.
403(b) plans already follow a universal availability rule, so the new 500-hour rule will not affect them.
Previously,
401(k) plans could exclude part-time employees working fewer than 1,000 hours per year.
A plan could impose a waiting period of up to one year before an individual became eligible to participate.
For plans that defined “years of service” based upon an “hours-of-service” definition, one year meant 1,000 hours.
403(b) plans already follow a universal availability rule, so the new 500-hour rule will not affect them.
Source: IRS
Better Access, Less Disparity
Part-Timers’ Work Week
<8 hours
13%
8 – 16 hours
26%
>16 – 24 hours
36%
>24 hours
25%
<8 hours
13%
8 – 16 hours
26%
>16 – 24 hours
36%
>24 hours
25%
<8 hours
13%
8 – 16 hours
26%
>16 – 24 hours
36%
>24 hours
25%
<8 hours
13%
8 – 16 hours
26%
>16 – 24 hours
36%
>24 hours
25%
Workers Under Age 50 Who Have Over $50,000 In Retirement Savings
74%
Full time
34%
Part time
74%
Full time
34%
Part time
74%
Full time
34%
Part time
74%
Full time
Part time
34%
Source: 2020 PLANSPONSOR Participant Survey
For Part-Timers Who Still Don’t Qualify for the 401(k) ...
Currently, the limit on annual contributions to an individual retirement account (IRA), pretax or Roth, or a combination, remains at $6,000 for 2021. The catch-up contribution limit, which is not subject to inflation adjustments, remains at $1,000. 2021 IRA contributions may be made until April 15, 2022.
Source: IRS