The SECURE Act, which passed the House on May 23, 2019, but languished in the Senate, has important implications for retirement savings.
In a series of four posts, I will provide an overview of a few of the more noteworthy features of the legislation. In this first post, I examine the creation of a new rule requiring 401(k) plans to cover long-term part-time workers. A subsequent post will discuss other changes impacting 401(k) plans, including liberalizations of the safe harbors that allow a 401(k) plan to bypass contribution nondiscrimination testing, and a provision that seeks to encourage the inclusion of annuity payments as a form of 401(k) plan distribution. Another will describe an extension of the time limit on adopting a new retirement plan, to make it effective for a tax year, and the fourth post will discuss the changes made by the Act to the required minimum distribution rules applicable to retirement plans and IRAs.
Impact on 401(k) Plans
A number of the provisions of the SECURE Act are directed at enhancing savings through 401(k) plans, including one which may have significant consequences for employers with 401(k) plans who employ large numbers of part-time employees.
Under current law, an employer may require a worker to work at least 1,000 hours in a 12-month period in order to be eligible to participate in a 401(k) plan. The SECURE Act creates a new category of long-term part-time workers, who are defined by the Act as employees who have attained age 21 and who complete more than 500 hours of service, but less than 1,000 hours of service, in three consecutive years. Under this provision, which takes effect beginning January 1, 2021, a part-time employee who meets this requirement must be permitted to make elective contributions to an employer’s 401(k) plan. The new rule does not apply to employees covered under a collective bargaining agreement.
Part-time employees who the Act requires be eligible to make elective contributions to a 401(k) plan will not have to receive employer contributions such as matching contributions. However, if they do receive employer contributions, the plan must credit a year of service under the plan’s vesting schedule for those contributions for each year in which the employee works at least 500 hours, as opposed to the general rule that credits a year of vesting service for a year in which an employee works at least 1,000 hours.
Long-term part-time employees participating in a 401(k) plan do not need to be included in determining whether the plan passes the IRS nondiscrimination test used to measure whether elective contributions to the plan disproportionately favor highly compensated employees. Also, pursuant to an exception of importance to smaller 401(k) plans, there is no requirement that a three percent top-heavy minimum contribution be made to the plan on behalf of these employees.
The practical implications of this new rule appear to be primarily administrative. Employers will now have the burden of monitoring the service of part-time employees and ensuring that the employees, upon completing three consecutive years of part-time service, receive all elections and other necessary communications. In addition, because eligibility to participate alone makes an individual a plan participant for various regulatory purposes, some small companies with large numbers of part-time employees may find that this change in the law causes their plan to have more than 100 participants, a threshold that triggers the requirement (and associated cost) of the plan having audited financial statements.
It also bears mentioning that a determination that a company has incorrectly characterized a worker as an independent contractor, rather than a part-time employee, may cause a finding that the company has run afoul of this rule.