Employee Benefit Plans (EBPs) are crucial for attracting and retaining top talent, promoting employee well-being, providing financial security, offering tax advantages, maintaining a competitive advantage, complying with legal requirements, and enhancing overall workplace productivity and satisfaction. With such an important asset for employees, as well as businesses themselves, it’s important to make sure your 401K plan is evolving with the times and staying compliant.
Here’s everything you need to know about the Secure Act changes, along with it’s sequel Secure 2.0 which was signed into law in late 2022.
Changes for Long-Term Part-Time Employees
The SECURE Act requires 401(k) plans to allow some part-time employees to make salary-reduction contributions that reduce an employee’s taxable salary. These contributions — technically known as “elective deferrals” — reduce an employee’s taxable income for the year.
Thanks to the SECURE Act change, salary-reduction contributions must now be allowed for an employee who meets the following two conditions:
- The employee has worked at least 500 hours per year with the employer for at least three consecutive years, and
- He or she is 21 or older by the end of the three-consecutive-year period.
Employees who pass these tests are now classified as “long-term part-time” employees, a new term under the tax code. Note that in determining whether an employee passes the three-consecutive-year test, 12-month periods beginning before January 1, 2021, aren’t counted. So, the SECURE Act change won’t be mandatory for an employee until January 1, 2024, because no employee can pass the three-consecutive-year test before then.
The SECURE Act doesn’t eliminate the prior-law 1,000-hour-per-year rule. Basically, 401(k) plans must now have a dual eligibility requirement. An employee can become eligible to make salary-reduction contributions by working either:
- At least 1,000 hours in one year, as under prior law, or
- At least 500 hours per year for three consecutive years and being age 21 or older at the end of the three-year period.
In other words, the SECURE Act change only affects employees who work between 500 and 999 hours per year. Those who work fewer than 500 hours can still be excluded from a 401(k) plan as under prior law. Those who work 1,000 hours or more were already eligible to participate in making salary-reduction contributions under prior law.
Important to Note: The SECURE Act change doesn’t require long-term part-time employees to be made eligible to participate in other features of a 401(k) plan. So, for example, as under prior law, the plan can continue to treat an employee as ineligible for employer matching contributions if the employee hasn’t worked for at least 1,000 hours in a year (that is, hasn’t completed a so-called year of service).
Secure Act Changes for Part-Time Employees
A change included in SECURE 2.0 further liberalized the 401(k) plan participation rules. It does so by making it easier to be classified as a long-term part-time employee.
Specifically, SECURE 2.0 will reduce the three-consecutive-year rule set forth in the original SECURE Act to two years. The change is effective for plan years beginning in 2025 and beyond.
A Moving Target
The 401(k) plan participation rules for part-time employees have become a moving target under the original SECURE Act and SECURE 2.0. Contact your retirement plan advisor if you have questions or want to make sure that your organization’s plan documents are up to date and in compliance with the current rules.
|Automatic Enrollment Provision of SECURE 2.0SECURE 2.0 will make another important change to the 401(k) plan participation rules. This change will affect all employees, not just part-timers. Currently, 401(k) plans can enroll employees for automatic salary-reduction contributions based on a predetermined percentage of salary — unless the employee opts out or elects a different contribution percentage. SECURE 2.0 stipulates that new 401(k) plans must call for automatic contributions of at least 3%, but not more than 10%, of salary during an employee’s first year of participation — unless the employee elects otherwise. Effective on the first day of each plan year after an employee has completed one year of participation, the contribution percentage must automatically increase by 1% to at least 10%, but not more than 15% — unless the employee elects otherwise. However, for plan years ending before 2025, the maximum percentage is 10%. These SECURE 2.0 automatic enrollment changes will take effect starting in 2025.
Maximize Your EBP Potential
Whether you have specific questions about the SECURE Act updates or want an employee benefit plan expert to take a look at your benefit package, don’t hesitate to connect with us. At Clark Schaefer Hackett, we have an entire team of tenured professionals whose specialize in EBPs. The EBP team has decades of experience helping businesses of all sizes and industries.