Part-time Employees Are Eligible to Enroll into 401(k) Plans in 2024

Starting this year, part-time employees meeting the SECURE Act’s three-year rule are eligible to participate in their employer’s 401k plan.

The SECURE Act of 2019 (now dubbed SECURE 1.0) expanded 401k plan participation to include long-term part-time (LTPT) employees effective January 1, 2024.  To meet eligibility requirements an employee must have worked at least 500 hours, completed three consecutive years of service, and reached age 21 by the end of the third year.

A year of service is any 12-month period in which an employee works at least 500 hours, and begins with an employee’s date of hire. Employees that worked at least 500 hours in 2021, 2022, and 2023 are eligible to participate in their employer’s 401(k) plan in 2024. Any service prior to 2021 is excluded from eligibility.

The proposed IRS rules confirm LTPT employees will follow the same entry date rules that apply to other eligible employees. For example, if your plan entry dates are January 1 and July 1, and you meet eligibility requirements in May, you can join the plan starting July 1.

Coverage Expanded with SECURE 2.0

SECURE 2.0, which passed at the end of 2022, expanded the provision to include 403(b) plans subject to ERISA. Additionally, the three-year service requirement reduces to two years for plan years 2025 and later.  This means part-time employees that work at least 500 hours in 2023 and 2024 will be eligible to enroll starting in 2025.

An Employer Match Is Not Required

Long-term part-time employees are covered under separate rules from other plan participants. LTPT employees can opt to make elective deferrals, however, employer contributions such as a match or profit-sharing contributions are not required. Additionally, plan participants that are eligible based on LTPT rules are excluded from annual coverage and nondiscrimination testing. If an employee becomes eligible to participate in the plan for any other reason, they will not fall under the LTPT rules.

Steps Plan Sponsors Should Take

Plan sponsors are required to track hours for part-time employees. Hours should be provided to recordkeepers for plan years 2021 and later for 401(k) plans, and 2023 and later for 403(b) plans.  Going forward, plan sponsors should include all employees with each payroll file. This will ensure accurate records for those benefiting from this change not only in 2024 but down the road.