If your plan requires employees to work 1,000 hours in a 12-month period to become eligible, you’ll soon need to start watching hours more closely. Having this 1,000-hour rule generally excludes those employees who work part-time, seasonal or temporary. The SECURE Act signed in December 2019 has made changes for plan years beginning after December 31, 2020.
Long-term part-time (LTPT) employees must now be allowed to make salary deferrals to a plan. In order to be eligible, these LTPT employees must complete at least 500 hours of service in three consecutive 12-month periods and have attained age 21. Plans will need to start tracking these hours beginning January 1, 2021. This means the earliest a LTPT employee can begin making deferrals is January 1, 2024. This does not apply to union or 403(b) plans.
It’s important to note the following:
- Hours prior to January 1, 2021 are not taken into account for purposes of determining eligibility.
- LTPT employees will only be allowed to defer, and may still be excluded from becoming eligible for employer contributions such as match or profit sharing.
- LTPT eligible employees are excluded from nondiscrimination and coverage testing, safe harbor contributions and in applying the top-heavy minimums.
The SECURE Act also modified the vesting rules. Based on current guidance, if a plan sponsor chooses to provide these LTPT employees with an employer contribution, vesting service accrues at 500 hours each year, including years prior to 2021.
It’s important to start thinking now about how this new rule will affect your plan, and prepare for how you will track hours. An amendment will be required by the last day of the plan year beginning on or after January 1, 2022 (December 31 for calendar year plans).
Please contact your Watkins Ross representative if you have questions about your plan provisions.