Part-time employees have historically faced barriers to accessing their company’s retirement plan. Prior to recent legislative changes, only 39% of part-time private sector workers had access to a plan, compared to 77% of full-time employees.

However, the introduction of the SECURE Act 2.0 has enabled more part-time employees to save for their futures. Passed by Congress in December 2022, the goal of this bipartisan legislation is to further boost retirement savings nationwide and expand upon the original SECURE Act passed in 2019.

The SECURE Act 2.0 brings forth several changes that impact employers offering a retirement plan, including updates to eligibility for what's known as "long-term, part-time" employees. This article will guide you through these new eligibility changes and highlight what employers need to know.

Eligibility Prior to the SECURE Act 2.0

Before 2020, businesses were allowed to exclude employees from their retirement plan if they worked fewer than 1,000 hours during the plan year. The original SECURE Act from 2019 made strides in this area by requiring employers to allow long-term, part-time employees to contribute to the company’s 401(k) plan if they worked at least 500 hours per year for three consecutive years, subject to age and entry date requirements.

The service hour counting period for this rule began on January 1, 2021 for calendar year plans. Therefore, given the original SECURE Act’s three-year service requirement, the earliest a long-term, part-time employee could have become eligible to defer into the plan was January 1, 2024.

Now, with the SECURE Act 2.0, even more Americans will soon be able to contribute to their employer’s retirement plan.

What Is the Timeline for Compliance?

The service counting period for the SECURE Act 2.0 rules is the same as the original SECURE Act, where hours of service for long-term part-time eligibility are counted starting on January 1, 2021, for calendar year plans. The earliest a long-term, part-time employee can become eligible under these new rules would be January 1, 2025 for a calendar year plan. Pre-2021 service is disregarded.

Tracking Eligibility

For some employers, tracking employee hours is difficult or even impossible. Fortunately, employers have other options when choosing a plan design that do not require manually counting and tracking service hours. For example, a plan may be designed using alternative methods for determining employees’ eligibility, such as:

1. The Elapsed Time Method: An employee becomes eligible after being employed for a certain amount of time, without hours being taken into consideration. The maximum for most plan designs is 12 months of service, but other timeframes, like three or six months of service, are common.
2. Hours Equivalency Methods: The plan eligibility is still based on actual hours worked, but rather than track those hours, an employee is credited with hours of service based on the Department of Labor’s equivalencies for the number of days, weeks, or months of service performed, regardless of the actual hours worked. The Department of Labor’s Hours of Service equivalencies are as follows:
   • Daily: 10 hours
   • Weekly: 45 hours
   • Bi-weekly: 95 hours
   • Monthly: 190 hours

This can also be used in conjunction with plans that do require hours of service as a way to credit employees for whom such hours are not tracked, like salaried employees.

What Employers Need to Do

Touch Base With Professionals

Check in with your service provider (third party administrator or recordkeeper) and financial advisor, if you have one, to confirm your plan aligns with the new eligibility requirements and that your plan documents are up-to-date.

Track Employees’ Hours

If your plan document requires you to track employees' service hours, be sure you have accurate hours tracked at a minimum back to January 1, 2021, for calendar year plans. If your vesting schedule also uses actual hours for service crediting, be sure you have hours tracked as far back as your vesting schedule goes, if longer (i.e., a 6-year graded vesting schedule would need accurate hours of service back to 2018). This information is vital in determining whether or not certain employees are or will become eligible for your plan.

Some service providers will track and manage employee hours for you. Vestwell partners with dozens of payroll providers that supply your employees’ hours of service directly to us. We track this service and notify employees directly when they are eligible to enroll in your company’s plan.

Conclusion

The nation’s retirement savings gap presents a crisis for workers—according to the 2022 Survey of Consumer Finances (SCF), almost half of American households have nothing saved for retirement. The SECURE Act 2.0 represents a significant shift towards inclusive retirement planning, expanding accessibility for more employees to save for their future, including long-term, part-time employees.

Transitioning to meet these updated eligibility requirements gives employers a prime opportunity to support these efforts to close the nation's savings gap. By doing so, businesses not only comply with federal regulations but will also invest in the financial well-being of their employees, fostering a more engaged and loyal workforce.