Ernie Guerriero, CLU®, ChFC®, CEBS, CPCU®, CPC®, CMS, AIF®, RICP®, CPFA
Beginning January 01, 2021, employers must track their part-time employees’ hours. Currently, the most restrictive an employer may be in allowing employees to participant in the Plan is one year of service and attaining age 21. The one year of service is defined as working 1,000 hours in a 12 consecutive month period. Any service prior to the effective date is not counted, the clock starts ticking on the effective date.
Under the new rules, a 401(k) plan may not require an employee to complete a period of service that is longer than (i) the 12-month period when the employee completes 1,000 hours of service or (ii) a period of three consecutive 12-month periods during each of which the employee completed at least 500 hours of service, so long as the employee has turned age 21 before the end of the third year. The IRS classifies these workers “long-term, part-time employees.”
This will also impact vesting. Each 12-month period in which the employee has at least 500 hours of service is included when determining if that employee’s employer contributions are vested. There are some exceptions, the most common is exclusion from years of service before the employee reaches age 18 and for collectively bargained union employees.
Keep in mind the employer may omit these employees from the nondiscrimination and top-heavy testing and from any match or profit share contribution. The employee is simply allowed to elect to make 401(k) deferrals.