SECURE 2.0 COVERAGE FOR LONG-TERM, PART-TIME EMPLOYEES Apr 20

SECURE 2.0 COVERAGE FOR LONG-TERM, PART-TIME EMPLOYEES

Historically, a retirement plan could be designed to require employees to work at least 1000 hours during a year before they were eligible to join the plan.  This meant that a part-time employee (someone with less than an average of 20 hours per week) could not participate in the retirement plan (if the plan was designed this way- and many were designed this way).  In 2019 the SECURE ACT, now often referred to as SECURE 1.0, changed this rule.  Coverage was expanded to allow employees who worked at least 500 hours in three consecutive years to participate in a plan’s salary deferral provision beginning in January 2024. SECURE 2.0 has shortened the three consecutive years to two.

SECURE ACT 1.0 Rule:

For plan years beginning on or after January 1, 2021, 401(k) plans must track employees’ hours.  If an employee works 500 or more hours in three consecutive years, the employee must be allowed to make elective deferrals in the following plan year.

• No employer contributions are required to be given.
• Special nondiscrimination rules allow these participants to be tested separately from other participants.

SECURE ACT 2.0 Rule:

For plan years beginning on or after January 1, 2025, the wait is shortened from three years to two years.  In addition

• Pre-2021 service is disregarded for 401(k) plan vesting.
• A safe harbor plan will not lose a top-heavy exemption for letting the long-time part-time employee in the plan. This is effective as if included in Secure 1.0.
• ERISA 403(b) plans are included but they can ignore service for vesting and eligibility prior to 2023.

Effective date: Plan Years beginning in 2025

Eligible plans: 401(k), ERISA 403(b)

Act Section: 125