On December 20, 2019 the SECURE (Setting Every Community Up for Retirement Enhancement) Act was passed into law. One of the more significant parts of the new law is the requirement to allow long-term part-time (LTPT) employees the right to make elective deferrals.
To be eligible, employees must work between 500 and 999 hours per year for three consecutive years. This requirement goes into effect for the 2024 plan year. However, service will need to be tracked starting in the 2021 plan year in order to calculate the three years of eligibility. Plans can still maintain their regular eligibility requirements for plan entry and employer contributions. This new rule only effects the LTPT employee’s ability to make 401(k) deferrals. This is a positive step for those who are working part time, but it can be an administrative burden for the plan sponsor.
Often, there can be issues with tracking hours. Not all plan sponsors have adequate tracking systems or don’t use hours to compute their regular plan eligibility. While eligibility computation can typically be outsourced to your recordkeeper, the records of hours worked would still need to be maintained. An alternative to tracking hours can be implemented by tracking equivalencies. For example, employees would be credited with a certain number of hours for each period worked:
- 10 hours per day
- 45 hours per week
- 95 hours per semi-monthly pay period
- 190 hours per month
However, with the last equivalency, an employee who worked at any time during the month would automatically be credited with 190 hours.
Much of the SECURE Act is focused on expanding retirement plan coverage, and this provision is no exception. It is probably the most burdensome of all the components on the Act. We are working with our software providers and plan sponsors to make sure we are ready to handle this new law. If you have any questions, please let us know!