Retirement Perspectives: Upcoming Legislative Impact on Plan Design

Remember 2019? It was in December of that year (which seems very long ago now) that the SECURE Act was signed into law.

Today, as COVID-19 continues to be at the forefront, the SECURE Act may have been deprioritized in favor of other pressing issues. But make no mistake, it is still out there — and it does require attention. One of the more impactful changes coming out of the SECURE Act is related to the eligibility of part-time employees. This may affect a great number of retirement plans.

If an employer has long-term part time employees, one of the major SECURE Act changes will likely impact their plan and the review of this demographic of employees should start in 2021.

Prior to the SECURE Act, plans could set a year of service for eligibility purposes at a minimum of 1,000 hours worked during a plan year. Under the SECURE Act, the required hours have been reduced. Employees who are at least 21 years old and who work at least 500 hours in three consecutive 12-month periods must be allowed to make salary deferrals in the 401(k) plan. The definition of a year of vesting service is also changing to reflect the 500-hour minimum, rather than the former 1,000 hours in a plan year requirement. These rules become effective for plan years that begin after December 31, 2020.

While long-term, part-time employees will be able to make salary deferrals, they are not required to be included in employer matching contributions or other contributions from the employer.

This is a forward-, not backward-looking, provision. Sponsors should start tracking the hours of their part-time staff for the plan year beginning after December 31, 2020. Workers who accumulate at least 500 hours of service during the first, second and third years after that date must be allowed to begin salary deferrals in the plan during the subsequent plan year. For a calendar year plan, deferrals would be allowed during the 2024 plan year from employees with at least 500 hours of service in 2021, 2022 and 2023.

It is worth noting that employees included in the plan only because of this provision—those with less than 1,000 hours of service — do not need to be included in the plan’s nondiscrimination tests, including top-heavy testing. As before, employees with at least 1,000 hours of service and who meet the plan’s age requirement must be included in the tests.

In general, plan sponsors have until the last day of the 2022 plan year (December 31, 2022, for calendar-year plans) to adopt the amendments required by the SECURE Act. However, operational compliance is required during the period between the actual plan amendment date and the effective date for the SECURE Act’s required changes.

WoodTrust is ready to help ensure the timely adoption of these provisions and continued compliance with these and other provisions of the SECURE Act.