SECURE 2.0 - New Laws Expand Retirement Plan Eligibility for Long-Term, Part-Time Employees

On December 29, 2022, President Biden signed into law The Consolidated Appropriations Act of 2023, a $1.7 trillion omnibus spending bill that includes many long-anticipated changes to employer-sponsored retirement plans. The portion of this new law impacting retirement plans is called the SECURE 2.0 Act of 2022 (SECURE 2.0), which expands on many provisions from its earlier version, known as the Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0), adopted on December 19, 2019. The fundamental goal of SECURE 2.0 is to make it easier for employees to save for retirement.

While there are over 90 provisions addressed in the new law, this article is the first of a series that discusses the highlights of important key provisions in SECURE 2.0. One of the new provisions of SECURE 2.0 now allows long-term, part-time workers who would have been excluded from participation to save for retirement by reducing the hurdles for plan eligibility. 
 

Long-Term Part-Time Workers are Eligible to Participate 

 

Prior Rules

Historically, the rule under the Employee Retirement Income Security Act of 1974 (ERISA), was that an employee could not be excluded from participating in a 401(k) plan beyond age 21 or after completing 1,000 hours of service during a 12-month period (year of service). 

SECURE 1.0 expanded eligibility by requiring that employees who perform 500 hours of service during a consecutive three-year period must also be permitted to participate in the employer’s 401(k) plan. 
 

New Rules

SECURE 2.0 expanded this requirement even further by reducing, from three years to two, the maximum number of years an employer may require a part-time employee to work before they are eligible to contribute to a retirement plan. SECURE 2.0 also extends this long-term, part-time coverage rule to ERISA-governed 403(b) plans. 
 

Exceptions

As with most retirement plan rules, there are exceptions. This rule does not apply to employees covered by a collective bargaining agreement, nonresident aliens who receive no earned income, or certain students. 
 

Eligibility

Once a long-term, part-time employee works the required hours for two years in a row, the employee must be allowed to contribute to the plan by the earlier of (i) the first day of the plan year after satisfying these service requirements or (ii) six months after satisfying these service requirements. 
 

Plan Administration

Employers must start counting hours on the employee’s date of hire. However, if the employee does not complete the 500 hours of service in the first 12 months, the employer can switch to the first day of the plan year to count hours going forward. 
 

Vesting

SECURE 2.0 updates the vesting rules so that an employee receives credit for a full year of service for each year they complete 500 hours of service. 
 

Employer Contributions

Employers are not required to make matching contributions or nonelective contributions for employees who become eligible under this new rule. 
 

Effective Date

This provision of SECURE 2.0 is effective for plan years starting January 1, 2025.
 

Examples

The XYZ Company sponsors the XYZ Company 401(k) Plan. Elizabeth is an employee and has been working 700 hours per year since 2018. Robert was hired on July 1, 2022, and works 900 hours per year. When are Elizabeth and Robert eligible to participate in the retirement plan?

• Under SECURE 1.0, the company was required to start tracking Elizabeth’s hours beginning January 1, 2021, and after working 700 hours in 2021, 2022, and 2023, she would become eligible to participate in the XYZ Company 401(k) Plan on January 1, 2024.
• Under SECURE 2.0, the twelve-month periods beginning before January 1, 2023, are not considered for eligibility. Therefore, if Robert works 900 hours in 2023 and 2024, he will become eligible to participate in the XYZ Company 401(k) Plan on January 1, 2025.

For more information about how SECURE 2.0 might affect your employee benefit plans, please contact Gary Blachman or the Ice Miller Workplace Solutions attorney with whom you regularly work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.