Update: IRS Guidance Clarifies Years of Service for Vesting
Editor's Note: IRS Notice 2020-68, released Sept. 2, 2020, clarifies that all years of service, even years before 2021, must be considered for determining a long-term part-time employee's vesting in any employer contributions allocated to that participant's account. See the SHRM Online article IRS Guidance Clarifies Employers' SECURE Act Obligations.
-- SHRM Online
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 seeks to expand retirement plan coverage for U.S. workers. This includes a new requirement for 401(k) plans to permit part-time employees who work at least 500 hours for three consecutive years (the tracking period starts after Dec. 31, 2020) to make elective deferrals.
Although employers don't need to allow long-term, part-time workers to contribute until 2024, keeping track of their hours must start next year.
While this is a positive step for employees, for retirement plan sponsors it is likely to be the SECURE Act provision with the most significant administrative burden.
Limitations of the Provision
To be eligible under the new provision, employees must work between 500 and 999 hours per year, for three consecutive years. This new rule only applies to elective deferrals; the present employer-contribution eligibility rules, stating that a plan can impose a service requirement that excludes many part-time employees, remain unchanged. However, these 500-to-999-hour years of part-time service will count towards employer contribution vesting purposes.
A plan may still impose age requirements for these employees. Thus, if an employee does not satisfy the age requirement by the completion of the three consecutive years of 500 hours or more, the employee may still be excluded. It should also be noted that this new rule will not impact the plan's nondiscrimination testing in any way.
The new provision applies to all 401(k) plans, except those that are collectively bargained. However, the new rule applies only to 401(k) plans; other types of elective deferral plans, such as 403(b) and 457(b) plans, already have their own elective deferral rules. For 403(b) plans, the "universal availability" provision requires plans to allow all employees the right to make elective deferrals, with limited exceptions. Governmental 457(b) plans are free to distinguish the employees allowed to make elective deferrals, and private, tax-exempt 403(b) plans must discriminate in favor of select management or highly compensated employees
Plan Sponsor Concerns
While this a positive change for part-time employees, particularly younger ones looking to take advantage of compounding early in their working careers, it is concerning for many plan sponsors. There has been difficulty in tracking hours under the existing service rules; thus, tracking hours for part-timers under this somewhat complicated new rule poses greater challenges. While many plan sponsors may outsource the function to their recordkeeper, this does not resolve the data issue inherent to this type of tracking. Thus, the new rule may create operational compliance errors for many plans.
The provision may catch some 401(k) plan sponsors off-guard, as service will need to be tracked beginning next year (only six months from now), due to the three-consecutive-years requirement.
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Where Do We Go from Here?
The concern for accurately tracking part-time employee hours is justified. However, retirement plan sponsors do have alternatives that do not involve counting hours. For example, plan sponsors can allow all part-time employees to make elective deferrals to the plan, regardless of hours worked. These employees would not cost the employer any money in terms of employer contributions, since the standard age/service requirements still apply to employer matching and non-elective contributions. The likelihood of droves of part-time employees contributing to the plan is unlikely, so average account balances, which drive recordkeeper pricing, should not be negatively affected.
Another alternative for plan sponsors is to use equivalencies to credit the hours worked for purposes of the part-time service rule, meaning that employees are credited with a certain number of hours for each period they work:
- 95 hours per semi-monthly pay period.
- 190 hours per month (note: if an employee works one hour in a month, he/she is credited with the whole 190 hours)
While the SECURE Act part-timer provision does not directly address equivalencies, it appears that these could be used, since, similarly, to allowing all part-timers to make elective deferrals, this would be as favorable to part-time employees as the SECURE Act provision.
Michael A. Webb is vice president at retirement plan advisory firm Cammack Retirement Group. © 2020 Cammack Retirement Group Inc. This article was originally posted on the firm's website on May 27, 2020. All Rights Reserved. Republished with permission.
Related SHRM Article:
SECURE Act Alters 401(k) Compliance Landscape, SHRM Online, January 2020