Reminder for 401(k) Plan Sponsors: Long-Term, Part-Time Employee Eligibility Requirements Take Effect in 2021 under the SECURE Act

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed a number of requirements for retirement plans in 2020 and beyond.

Certain changes under the SECURE Act already are in effect in 2020, including changes to the required minimum distribution rules for participants and beneficiaries, and changes to qualified automatic contribution arrangements under defined contribution plans, as discussed in more detail in our prior alert.

For sponsors of 401(k) plans, a key upcoming change is the requirement to expand eligibility to long-term, part-time employees, effective for plan years beginning on or after January 1, 2021. Under this rule, if a part-time employee has worked at least 500 hours in three consecutive years and is at least age 21 by the last day of the three consecutive year period, he or she must be offered the opportunity to make elective deferrals to the employer’s 401(k) plan. For purposes of determining whether an employee has worked at least 500 hours per year in three consecutive years, plans are not required to take into account hours of service in plan years beginning before January 1, 2021. As a result, although affected plan sponsors will need to start tracking hours for this purpose beginning in 2021, plans will not be required to permit qualifying long-term, part-time employees to make deferrals under 401(k) plans before plan years starting in 2024.