The 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the rules for 401(k) eligibility, as well as for top-heavy and nondiscrimination testing. The most recent expansion of eligibility to participate in 401(k)s went into effect at the start of 2021. Further SECURE Act updates may be in the works. Read on below to learn what these new rules mean for your small business 401(k) plan.
Who is eligible to participate in 401(k) plans in 2022?
Previous to the SECURE Act, part-time employees working less than 1,000 hours in a year could be excluded from an employer’s 401(k) plan. Plan years beginning after December 31, 2020, require employers to open vesting to:
- All long-term, part-time employees who will be at least 21 years of age by December 31, 2023
- Have worked 500 to 999 hours each year for three consecutive years, and
- Who are not covered under separately governed collective bargaining plans like 403(b)s or 457(b)s
Employees must be at least 18 years old in 2021 for vesting and 21 to participate. Therefore, employers are not required to permit these long-term, part-time employees to enter the plan under this rule until January 1, 2024.
Do employers have to track time to determine eligibility?
Employers may choose to allow employee elective deferrals right away so they do not have to track hours. Otherwise, employers will need to update their administrative systems and begin tracking all service hours after January 1, 2021, to determine eligibility.
Do employers have to match part-time workers’ 401(k) contributions?
Employees working less than 1,000 hours a year must be allowed to make their own 401(k) contributions if they wish. But employers can still choose to exclude part-timers from employer matching contributions, safe harbor contributions, and employer profit share contributions.
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Are part-time workers included in non-discrimination testing under the SECURE Act?
Part-time employers who have recently gained eligibility to participate in the 401(k) plan solely under the SECURE Act provision can be excluded from annual non-discrimination and top-heavy tests.
What are the deadlines for plan sponsors to amend their 401(k) plan documents?
- All eligible part-timers must be allowed the opportunity to contribute to a 401(k) by January 1, 2024
- The SECURE Act changes must be reflected in the 401(k) plan documents by December 31, 2022
- Unless elective deferrals are immediately approved, employers need to track hours by January 1, 2021
What eligibility changes are included in the SECURE Act Update?
The House Ways and Means Committee introduced a SECURE Act update on October 27, 2020. If passed, the Securing a Strong Retirement Act bill (SECURE Act 2.0) would reduce the vesting period for long-term, part-time employees from three years to two years.
Starting in 2025, all eligible participants would be auto-enrolled at a minimum contribution rate of 3%. This rate will increase by 1% each year until reaching 10%, unless the employee specifically opts out. Also, eligibility for required minimum distributions would increase from 72 to 73. It’s best to start planning for changes to plan enrollment sooner than later.
Ubiquity offers easy, affordable 401(k) retirement plans for your small business. Contact us to learn how to start a new plan or if you have questions about switching from your current provider.