LAST REVIEWED Mar 22 2021 9 MIN READ
By The Human Interest Team
Employers who are competing for talent intentionally seek out ways to increase employee retention and happiness. That’s meant a concrete financial benefit for part-time employees and interns: companies are now offering 401(k)s to these types of workers, which was much less common in decades past.
This is great news, given that many interns and part-time employees make much less than their full-time counterparts because they are often students, juggling multiple part-time jobs, or may have family responsibilities that put them in a less secure financial position. Offering a 401(k) is a smart business decision for the employer, but also a thoughtful benefit to offer for employees’ long-term financial stability.
However, it’s important to note that being legally classified as an employee is required in order for someone to receive 401(k) benefits. Non-employees (e.g., consultants, contractors, 1099 workers, etc.) cannot participate in a qualified plan such as a 401(k) or 403(b) because qualified plans are required by law to be for “the exclusive benefit of employees.” A fringe case: non-qualified plans (e.g., 457 plans), available to governmental and specific non-governmental employers, may include independent contractors.
As reported in Wired Magazine, Uber started offering a benefit to help their drivers save for retirement, even though they were classified as contractors not employees. Because they can’t legally set up an employer-sponsored 401(k) plan, since these drivers are not W-2 employees, they’re offering an IRA service instead, which is a sign of the times — Uber is going out of their way to offer an extra benefit to their contractors, even though they can’t legally offer a 401(k).
The information in this article will be helpful to companies with part-time, full-time, and interns who are W-2 employees, rather than companies who work only with 1099 consultants and freelancers who aren’t eligible for the qualified 401(k) plan.
Do my interns and part-time employees qualify for a 401(k)?
Interns and part-time employees are allowed to participate in a 401(k) program, depending on whether or not they meet plan eligibility requirements. An employee must generally be allowed to participate in a qualified 401(k) plan after meeting the following conditions:
The employee meets the minimum age requirement of 21 years.
The employee has worked for at least one year of service (as defined below).
One year of service is considered 1,000 hours of work performed during the plan year. If an employee works for a 12-month period but doesn’t meet the minimum 1,000 hours worked, they aren’t considered to have performed one year of service. The Employee Retirement Income Security Act (ERISA) also specifies that a plan can’t require more than 1,000 hours to be worked during a year to be eligible to participate in the plan.
While most 401(k) providers don’t offer a lot of wiggle room when it comes to adjusting eligibility periods and age requirements (e.g., less than one year and 1,000 hours of service), Human Interest offers custom plan design. The team at Human Interest can also help consult on the compliance and legal impact of these custom requests.
Read more about how the SECURE Act affects employers and part-time employees.
Is providing a 401(k) plan to interns and part-time employees worth it?
From a recruiting and retention standpoint, it’s worth it to offer part-time employees and interns the option to participate in your company’s 401(k) plan. The tax benefits alone are very cost-effective, but providing this type of benefit demonstrates your commitment to all employees, regardless of their title or classification. Given today’s retirement crisis, many people just entering the workforce—or working fewer hours—are worried about their retirement in a way that previous generations weren’t.
At the same time, it’s more likely that part-time employees and interns won’t be earning as much discretionary income that they can use to make investments in their 401(k). According to the United States Department of Labor, “interns in the for-profit private sector who qualify as employees rather than trainees typically must be paid at least the minimum wage and overtime compensation for hours worked over forty in a workweek.” While most interns are being paid for their time, the amount they can contribute to their retirement may be minimal after deducting standard living expenses.
It’s the same situation for a part-time worker—depending on their position and the number of hours they work they may or may not have discretionary income to invest. Even when provided with an option to invest in the 401(k) plan, they may not have the ability to take advantage of the benefit. Some people also argue that minimum-wage workers who are offered 401(k) plans may be more likely to withdraw the cash to meet immediate financial needs, and would be required to pay tax penalties due to the early withdrawal.
Employers can support employees regarding these issues in a few ways:
Offer financial literacy training and resources to help employees learn how they can budget and save for their retirement
Provide a company 401(k) match so that employees don’t have to contribute out of their own paychecks. This is a good way to “raise” employees’ pay thanks to tax savings, while also being cost-effective for the company due to tax deductions.
Questions a business should consider before including or excluding employee groups from the 401(k) plan include:
Are there cost savings generated by excluding or including employees from the plan? Are the savings significant or minimal?
How will inclusion or exclusion impact recruiting, retention, and employee engagement efforts?
Are my competitors offering a 401(k) plan benefit to their part-time employees and interns?
Will the inclusion of these groups impact any required employer contributions as they relate to non-discrimination testing and safe harbor matches?
Does excluding these categories of employees significantly simplify 401(k) plan administration?
Can your budget handle the additional financial impact if there are employer match contributions in place?
What impact will offering this benefit have in terms of positive brand awareness and employer-of-choice recognition?
As long as a 401(k) plan meets Internal Revenue Code coverage requirements, an employer is not required to include all employees in the 401(k) plan. However, employers should use caution when limiting coverage—excluding employees may have a severe, negative impact on employee engagement which may increase costs rather than save them.
If you’d like a walk-through of the various 401(k) options available for businesses who employ part-timers and interns, request more information from Human Interest here.
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.