12/12/2023

January 1, 2024, Deadline: Long-Term, Part-Time Employee Eligibility in 401(k) Plans

In a matter of weeks, the rules governing eligibility criteria for 401(k) plans will undergo a significant change. By January 1, 2024, 401(k) plans that exclude employees who work less than 1,000 hours a year from eligibility must now allow employees who perform 500 hours of service in three consecutive years to participate in the plan. For plans not on a calendar year, the change must be instituted by the first day of the 2024 plan year.

Essential Details:

The long-term, part-time requirement stems from the original SECURE Act that was passed in 2019. There are certain exclusions for particular groups of employees (e.g., certain employees covered by a collective bargaining agreement and non-resident aliens with no US-source income) from the rule.

Additionally, although employer contributions are allowed, they are not mandatory for long-term, part-time employees under the new requirements. If an employer makes contributions, vesting is based on years of service that include 500 hours.

Action Steps for Plan Sponsors:

Plan sponsors should review data back to January 1, 2021, to determine if employees previously ineligible must be allowed to make elective deferrals beginning January 1, 2024. Periods before January 1, 2021, do not apply for purposes of this new requirement.

If a plan currently includes a 1,000-hour requirement or part-time employee exclusion, the Plan Sponsor will need to amend its Plan. The amendment should be effective 2024 and must be adopted no later than December 31, 2025.

SECURE 2.0 Updates:

Looking ahead, SECURE 2.0 expands part-time employee eligibility even further. Beginning in 2025, employees who perform 500 hours of service over two consecutive years must be eligible to contribute to a 401(k) plan. SECURE 2.0 also extended the long-term, part-time rules to 403(b) plans. These changes are effective beginning January 1, 2025, or the first day of the 2025 plan year.

For assistance drafting plan amendments or for help understanding how these new requirements may affect your organization, please contact a McGrath North Employee Benefits attorney.