Recommended Read: Plan Sponsors, Plan Trustees, Financial Advisors.
As we previously informed you, the Internal Revenue Service (“IRS”) has created a new rule that will allow certain of your long-term, part-time employees to begin participating in your 401(k) plan. Under these rules, the IRS has indicated that any employees who have worked for you for three consecutive years and who have completed at least 500 hours in each of those years will be eligible to participate in your plan. Please note that for these purposes, the IRS has indicated that your plan can exclude any service that is completed by your part-time employees prior to 2021. Therefore, the earliest that these employees would become eligible to participate in your plan is January 1, 2024. That is, you would need to look at the service your part-time employees complete during 2021, 2022 and 2023 to determine if they had completed at least 500 hours in each of those years so that they would become eligible on January 1, 2024.
- Example 1: Sally is employed on a part-time basis by ABC Company. During 2021, Sally works 600 hours. In 2022, she works 750 hours. Finally, in 2023, she works 550 hours. Sally will be eligible to make 401(k) salary deferral contributions to the ABC Company 401(k) Plan on January 1, 2024 because she completed at least 500 hours during three consecutive years.
- Example 2: John also works at ABC Company on a part-time basis. He works 700 hours in 2021, 750 hours in 2022 and 400 hours in 2023. John is not eligible to participate in the ABC Company 401(k) Plan on January 1, 2024 because John did not complete at least 500 hours in three consecutive years. ABC Company will have to start counting John’s hours in 2024 again to determine if he completes at least 500 hours in a subsequent three-consecutive-year period to determine if he will later be eligible. In this case, the earliest he would be eligible is January 1, 2027, if he completes at least 500 hours in 2024, 2025 and 2026.
The IRS has indicated that any of your part-time employees who become eligible to participate under this new rule will be included only for purposes of their ability to make 401(k) salary deferral contributions from their own pay. Any employees allowed to participate as a result of this new rule will not be eligible for any additional contributions provided under the plan. For example, if your plan is a safe harbor plan, these employees would not be entitled to receive safe harbor contributions. Or, if your plan is a top-heavy plan and employees are required to receive employer contributions equal to the top-heavy minimum required contribution, these employees would not need to receive that contribution.
The IRS has indicated that any of these employees who actually contribute from their own pay would count, however, toward the participant count for determining whether your plan is considered a small plan or a large plan that requires a certified audit. Therefore, if your plan currently is considered a small plan and does not need to have an audit included with the plan’s Form 5500 filing, once these employees become eligible and start contributing, this may trigger your having to include an audit if the plan subsequently is deemed to be a large plan.
There is a proposed rule that would change the three-consecutive-year requirement to two consecutive years instead, meaning that your eligible part-time employees could begin participating as of January 1, 2023 instead of January 1, 2024. Again, though, this change is just proposed. In any event, we wanted to remind you of these rules that could impact your 401(k) plan, so that you can start looking at your part-time employees and planning for the future.
Also, and more importantly, we will soon be requesting your 2021 census information. It is very important that you accurately report to us the hours completed by all of your part-time employees so that when the applicable time comes to determine which of your part-time employees are eligible, we have accurate information for all years. Thus, where in the past if your plan requires completion of 1,000 hours to be eligible you only indicated “fewer than 1,000 hours” for an employee’s service during the year, you will need to provide us with a specific amount – for example, 650 – so that we can assist you in identifying your part-time employees who will be eligible to participate in the plan.
11/29/2021 – Last Updated
Editorial: Pension Services, inc
Credit: Pension Services, inc