The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was the first major update to retirement plans in more than a decade.
Certain provisions already debuted, but one of the most significant changes — expansion of eligibility to participate in 401(k) plans – went into effect on January 1, 2021. Wondering what these changes are and what they mean for your small business this year? As a leading small business 401(k) administrator, Ubiquity is here to clarify matters.
Who Is Eligible to Participate in 401(k) Plans, Under the SECURE Act?
The 401(k) retirement savings vehicle is no longer just for long-term, full-time employees working more than 1,000 hours. Under Section 112 of the SECURE Act, eligibility expands to workers who:
- Are at least 21 years old by the last day of the 401(k) plan year
- Work part-time for at least 500 hours per year, over the past three consecutive years.
When calculating whether or not an employee has worked “at least 500 hours,” plan sponsors are not required to count before January 1, 2021. So, while you have to start tallying up the hours your part-time workers are putting in starting this year, you may not have to formally enroll these workers into your 401(k) until the 2024 plan year.
The SECURE Act Eligibility Update’s Impact on Nondiscrimination and Top-Heavy Testing
The SECURE Act change will add a layer of administrative complexity, as plan sponsors develop new systems for tracking and reviewing hours for part-time employees over the one to three-year tracking periods.
Sponsors will need to consider whether part-time employees will also be eligible for employer contributions and whether to set a vesting schedule. If a long-term, part-time employee becomes eligible for employer contributions, each of the years they were employed and worked 500 hours (even before January 1, 2021) must count for vesting.
For employers who are subject to nondiscrimination and top-heavy testing, adding long-term, part-time employees can skew the results. The SECURE Act allows a testing exclusion for employees working 500 hours a year, but employees working 1,000 or more hours in one year must be included. If, when you start your plan, it contains more than 100 participants, you will require an independent qualified auditors report to accompany your annual Form 5500. If you’re a growing business that has been considered a small plan in the previous year, you will not be audited until you hit 120 participants.
If you are worried about your ability to pass these annual tests, you may want to consider contacting Ubiquity about adding a Safe Harbor provision to your plan for hassle-free administration.
Eligibility Questions to Consider
Plan sponsors may want to consider this short list of questions to ensure they are prepared for the change:
- Is the hours of service tracking system updated as of January 1 to stay compliant?
- Have you updated your plan administration documents to note the new eligibility criteria?
- Do you wish to expand eligibility for matching or non-elective contributions to these employees?
- Do you need to update new-hire and recruiting materials to ensure plan participation?
The House Ways and Means Committee introduced SECURE Act 2.0, otherwise known as the Securing a Strong Retirement Act bill, on October 27, 2020. If passed, this bipartisan bill would, among other things, reduce the 12-month measurement period for long-term, part-time employees from three years to two years. Simply put, don’t plan on making the changes in 2024; prepare your business to increase plan enrollment today.
If you think now is the right time to start your 401(k) retirement savings plan, or have questions about switching providers, call Ubiquity, a leader in setting up and administering low-cost 401(k) plans for small businesses and solopreneurs.