SECURE Acts

By Jennifer M. Mitchell, CPA PRINCIPAL | MEADVILLE, PA

Historically, plan sponsors were not required to let employees participate in their company’s 401(k) plan unless they worked at least 1,000 hours in a plan year. The U.S. Congress, in a bipartisan effort to make saving for retirement easier for all workers, has enacted laws that include making employer-sponsored plans more accessible to long-term, part-time employees.

SECURE Act of 2019

Signed into law in December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) changed participation eligibility rules for 401(k) plans by requiring that long-term, part-time employees be allowed to contribute elective deferrals into the plans. The SECURE Act defines a long-term, part-time employee as an individual who works more than 500 hours, but fewer than 1,000 hours for three consecutive 12-month periods. Plan sponsors for plan years beginning after December 31, 2022, are not required to include long-term, part-time employees in their 401(k) plan nondiscrimination testing, which includes the actual deferral percentage (ADP), coverage, and topheavy testing.

Based upon SECURE Act rules, then, the earliest date a long-term, part-time employee would become eligible to participate in a calendar year plan would be January 1, 2024, assuming the employee worked at least 500 hours for each plan year from 2021 to 2023.

SECURE 2.0

Signed into law at the end of 2022, SECURE 2.0 Act further modified the long-term, part-time employee rules by reducing the eligibility period for participants to make elective deferrals to two consecutive 12-month periods, providing that, for vesting purposes, services in the 12-month periods beginning before January 1, 2023, are not taken into account. It also extends the new rule and provision to 403(b) plans. But because they are already subject to the universal availability rules, the modifications may not substantially expand eligibility for 403(b) plans. The provisions under SECURE 2.0 are effective for plan years beginning after December 31, 2024.

Additional considerations

Plan sponsors should consider additional ways the SECURE Act and SECURE 2.0 will impact their 401(k) or 403(b) plan its administration. They will likely need to coordinate with payroll providers to ensure that employee hours have been properly tracked. Plan sponsors should also discuss with plan administrators what plan amendments may be necessary to bring their plan into compliance with these new rules.

Employers might also review other plan provisions and determine how they might be impacted by the Acts, including:

• Do you want to allow all part-time employees to make elective deferrals into the plan? Doing so for both 401(k) and 403(b) plans could lessen the burden of needing to track hours for all employees. As mentioned, 403(b) plans are subject to the universal availability rule, whereby all employees must be given the opportunity to make elective deferrals into the plan unless they meet certain exceptions, one of which is for an employee who “generally” works fewer than 20 hours per week.

• Do you want to make long-term, part-time employees eligible to receive employer contributions? Although the SECURE Act and SECURE 2.0 require you to allow those employees to make elective deferrals into the plan, there is currently no requirement for employers to contribute to their accounts, such as matching contributions or profit sharing contributions.

• Do you want to revisit the vesting rules for employer contributions? Under the new vesting rule, long-term, part-time employees must be credited with a year of service for all 12-month periods during which they have at least 500 hours of service. Vesting will continue even in situations where the employee transitions from long-term, part-time to full-time employment, that is, more than 1,000 hours of service in a plan year.

• Do you want participation restricted by age? Federal law does not set a minimum age for employees to be eligible to participate in a 401(k) plan. Plan sponsors can restrict participation in the plan by setting a minimum age threshold not to exceed 21. This is not applicable to 403(b) plans as age restrictions for eligibility are not permitted.

When making decisions regarding these key plan provisions, consideration should be given to what will be required to implement as well as administer them on an ongoing basis. The less complex the requirements, the easier the provisions will be to administer; the more complex, the greater the chances for costly errors that could be difficult to correct.