The proposed Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, has the potential of revamping the way Americans save in many different ways. One of these key changes is allowing long-term, part-time employees to participate in employer-sponsored 401(k) plans.
What is the current situation for part-time employees?
Limited access: Under the current legislation governing 401(k) plans and other defined-contribution plans, employers can exclude part-time workers who work fewer than 1,000 hours per year. Assuming a 20-hour workweek, 1,000 hours per year breaks down into 50 weeks out of the year. According to data from the U.S. Bureau of Labor Statistics, about 21% of American workers hold a part-time job.
Disproportionately affects women: The current law impacts women the most, as women are about twice as likely to be part-time workers than men according to the Bureau’s data. Other affected employees are seasonal employees, those who have to take parental leave, and those with other responsibilities or medical conditions that prevent them from working full-time.
The bottom line: The current 401(k) rules that allow employers to exclude part-time workers can be quite harmful to the roughly 3.5 million part-time workers in adequately preparing for retirement.
How does the SECURE Act affect 401(k) rules regarding part-time employees?
Except in the case of collectively bargained plans, the SECURE Act will require employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either:
A one year of service requirement (with the 1,000-hour rule), or
Three consecutive years of service where the employee completes at least 500 hours of service.
The latter rule works out to be about twenty-five 20-hour workweeks per year, which enables a large pool of workers to become eligible for workplace 401(k) coverage. However, the 3 years of 500 hours option began in 2021.
Does the SECURE Act provide any incentives to employers regarding this change?
Yes. Anticipating the additional necessary hours of administrative work and cost of processing additional part-time employees, the SECURE Act provides three key incentives to employers:
Relaxed testing rules: In the case of employees who are eligible solely by reason of the latter new rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.
Increased tax credit for startup and education costs: Under the current law, small businesses employing mostly or only individuals who work fewer than 1,000 hours per year were not required to offer a 401(k) plan to their employees. Now that those small businesses may have to start providing a 401(k), legislators increased the total tax credit to up to $15,000 to offset expenses needed to set up, administer, and educate employees about the plan over a three-year period. Additionally, it’s important to remember that 401(k) employer contributions are tax-deductible.
New tax credit for automatic enrollment: To encourage plan administrators to add an automatic enrollment feature to a 401(k), the SECURE Act creates a new tax credit of up to $500 per year to employers to defray startup costs for new plans that include automatic enrollment.
For more details refer to our guide on New 401(k) Tax Credits and How to Claim Them.
How do these news rules work with state-sponsored retirement savings plans?
Many states have already implemented state-sponsored retirement savings plans, are working out the details to implement one, or are in very early planning stages. Most state plans work like this: employers who decide not to offer a workplace plan must act as middlemen, let their eligible employees know about the state plan, and help employees with opting in or out of the state plan.
Some states, such as Oregon, include part-time workers in the eligible pool of workers to enroll in the state-sponsored plan. Currently, there is no guidance on how the rules from the SECURE Act and the state-sponsored plan would interact. But one thing is clear: Employers offering a 401(k) plan to all of their employees, including part-time workers, would only have to worry about processing the opting out of their employees from the state-sponsored plan.
Still have questions or want to learn more about how the SECURE Act affects your 401(k)? Reach out to Human Interest by clicking here.
Additional resources on the SECURE Act:
Article ByDamian Davila
Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.