IRS Provides SECURity Through 401(k) Plan Expansion to Long-Term, Part-Time Workers

By Anne Tyler Hall and Katharine Finley

On December 19, 2019, the House and Senate approved the Further Consolidated Appropriations Act of 2020. This legislative package of spending bills included the Setting Up Every Community for Retirement Enhancement Act (the “SECURE Act”) and was signed into law by President Trump on December 20, 2019. One of the more significant changes set forth in Section 112 of the SECURE Act includes expanded elective deferral eligibility provisions for 401(k) plans. Specifically, this provision provides for participation in the elective deferral component of a 401(k) plan by part-time workers who complete three consecutive 12-month periods of service with respect to which the worker is credited with at least 500 hours of service in each such 12-month period (the “Long-Term, Part-Time Workers”). On September 2, 2020, the IRS issued Notice 2020-68 (the “Notice”) that provides additional clarity with respect to this Long-Term, Part-Time Worker eligibility expansion. 

Previous and Updated 401(k) Eligibility Provisions 

Prior to the passage of the SECURE Act, a 401(k) plan could exclude part-time workers if the worker had not performed 1,000 hours of service in any 12-month period. Accordingly, 401(k) plans were permitted to include eligibility criteria allowing participation upon the later of: (i) attainment of age 21 or (ii) completion of a 12-month period during which the employee completed at least 1,000 hours of service (the “410(a) Period”). 

The SECURE Act amended Code Section 401(k) to expand eligibility for elective deferrals. The amended provisions provide that 401(k) plans may not require an employee to complete a period of service that extends beyond the close of the earlier of: (i) the 410(a) Period or (ii) the time period consisting of three consecutive 12-month periods in which the employee completes at least 500 hours of service during each such 12-month period. The Notice provides that the new rule does not apply to an employee unless the employee has attained age 21 by the end of the three consecutive 12-month periods of service. In addition, 401(k) plan sponsors are only required to take 12-month periods beginning on or after January 1, 2021 into account to determine whether these new Long-Term, Part-Time Worker eligibility requirements are applicable. Employers may elect to exclude these Long-Term, Part-Time Workers from testing under the nondiscrimination (including ADP/ACP testing) and coverage rules and from the application of the top-heavy plan rules. 

Disparate Effective Dates for Eligibility, Vesting, and Breaks in Service 

The Notice provides that the amendments related to expanded 401(k) plan elective deferral eligibility made by the SECURE Act apply to plan years beginning on or after January 1, 2021. While the SECURE Act does not require 401(k) plans to expand eligibility for employer nonelective or matching contributions, an employer may choose to do so. The Notice clarifies that a Long-Term, Part-Time Worker must be credited with a year of service for vesting purposes for each 12-month period during which the employee completes 500 hours of service. The SECURE Act does not exclude 12-month periods beginning on or before December 31, 2020. Therefore, all years of service with the employer maintaining the plan must be considered for purposes of determining the Long-Term, Part-Time Worker’s nonforfeitable right to employer contributions, unless such periods are otherwise disregarded. Disregarded periods may include any periods of service before the employee attained age 18, periods during which the employer did not maintain the plan or a predecessor plan, and periods during which service is not required to be taken into account under the break-in-service rules (as modified by the SECURE Act). 

The SECURE Act also modified break-in-service rules for Long-Term, Part-Time Workers. A break-in-service generally occurs if a participant has not completed more than 500 hours of service in a specified 12-month period, but the modified provisions provide that a break-in-service occurs if a Long-Term, Part-Time Worker has not completed at least 500 hours of service in the applicable 12-month period. 

As a result of the difference between service taken into consideration for elective deferral eligibility and service taken into consideration for vesting of other employer contributions, employers that elect to expand eligibility for employer contributions are required to track service for Long-Term, Part-Time Workers over two different periods, posing potentially significant administrative burdens. 

Possible Impact to 401(k) Plan Form 5500 Filing Requirements 

An Independent Qualified Auditor’s Report (IQPA) is required to accompany the Form 5500 annual 401(k) filing for plans with 100 or more participants at the beginning of the plan year. For purposes of determining whether an IQPA is necessary, “participants” means all employees who are eligible to participate in the plan, including those who are not actively participating, as well as separated employees with account balances (the “Eligibles”). Consequently, following the initial three-year measurement period, smaller employers (i.e., those with fewer than 100 Eligibles) with a substantial employee base of part-time workers may be newly subject to IQPA requirement beginning in 2024. 


ABC Company maintains a calendar year 401(k) plan and generally requires satisfaction of the 410(a) Period before an employee is eligible to participate. During 2021-2023, ABC Company employs, on average, 95 full-time employees and 30 part-time employees who average 15 hours per week during the year. ABC Company determines that the 30 part-time workers are Long-Term, Part-Time Workers eligible for participation in the elective deferral component of the 401(k) plan beginning January 1, 2024. During the 2023 plan year, ABC Company amends its plan to allow Long-Term, Part-Time Workers eligibility in a non-safe harbor 2 percent employer matching contribution feature effective January 1, 2024. This employer matching contribution feature utilizes a 5-year graded vesting schedule. 

HBL Comments: ABC Company must offer participation in the elective deferral portion of the 401(k) plan to the 30 Long-Term, Part Time Workers as of January 1, 2024. In addition, since ABC Company expanded eligibility for the employer match, ABC Company will need to make modifications to their administrative systems to track and account for hours of service performed in: (i) the 12-month periods beginning on or after January 1, 2021 to establish the future eligibility of employees to make elective deferrals and (ii) the 12-month periods prior to and after January 1, 2021 for employer matching contribution vesting purposes. These hours will need to be separately tracked for each Long-Term, Part-Time Worker. Finally, ABC Company will also need to engage a CPA firm to prepare an IQPA to accompany the Form 5500 filing for the 2024 plan year. 

Considerations: Plan Sponsors Prepare Now! 

With the advent of the Long-Term, Part-Time Worker 401(k) eligibility expansion, plan sponsors should not assume that an employee categorized as “part-time” will be permanently excluded from participation in the employer’s 401(k) plan. More importantly, plan sponsors should act now to develop, both internally and with outside third-party service providers, appropriate systems to track hours for Long-Term, Part-Time Workers before January 1, 2021. Employers should carefully consider whether to expand employer contribution eligibility to Long-Term, Part-Time Workers, when that expansion should become effective, and the impact of the potential administrative burdens. If a plan sponsor elects to expand employer contribution eligibility to Long-Term, Part-Time Workers, the necessity of development of retroactive tracking should be discussed with internal teams and outside third-party service providers to ensure retroactive tracking is feasible and can be accommodated as soon as employee contributions commence.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.
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