Significant retirement plan legislation, part of the SECURE Act, passed in December 2019, and then the CARES Act that was passed in March of this year, went into effect. While many of the provisions are fairly well known, one provision in particular will begin impacting independent insurance agencies that sponsor 401(k) plans on Jan. 1, 2021.
Historically, 401(k) plans allowed the employer to use participation thresholds for employees: working 1,000 hours per year and being age 21 or older. At that point, the employee could make salary deferrals to the 401(k) plan and could be eligible for any employer contributions.
The SECURE Act introduced an additional category of eligible employees: “long-term part time employees." Under the new rules, if an employee completes three consecutive 12-month periods, during which they work at least 500 hours and the employee has turned 21 years old before the end of the third year, they will be permitted to make salary deferrals to the plan.
This new eligibility rule does not apply to any 12-month period beginning before Jan. 1, 2021, so starting with January 2021, it will require employers and their 401(k) service providers to keep track of employee hours.
It's important to note that employers are not required to make profit-sharing or matching contributions to long-term, part-time employees. Employee contributions to a 401(k) plan are always 100% vested since it's the employee's money. But if the agency chooses to allow the part-time, long-term employee to also qualify for the employer contribution, the employee must be given credit for purposes of the 401(k) plan's vesting rules for each 12-month period when the employee has completed at least 500 hours of service. Agencies can still exclude service prior to age 18.
Agencies do not have to provide an employer contribution or 401(k) plan matching contribution under the new rules for long-term, part-time employees. The question is whether it makes sense to do so to provide an added incentive.
For example, if the employer makes a 3% contribution to their 401(k) plan and the employee is earning $20,000 part-time (again, less than 20 hours a week) this would equate to $600 annually to the long-term, part-time employee. It may be money well-spent, especially since the long-term, part-time employee would not have enough hours to qualify for health insurance benefits.
The Big “I" Retirement and Employee Benefits programs offers a great 401(k) plan option—the BIG I MEP 401k Plan, IRAs, simple IRA plans and SEPs. Our programs are designed to meet the needs of Big “I" members with maximum flexibility at a competitive cost. To learn more, contact Christine Muñoz.