New 401(k) Rules for Long-Term, Part-Time Employees
Recent changes under the SECURE Act of 2019 and SECURE 2.0 Act of 2022 have expanded 401(k) plan eligibility to include long-term, part-time (LTPT) employees. Employers need to understand these rules to ensure compliance and avoid costly corrections.
What Changed?
The SECURE Act of 2019 requires employers to allow employees who have worked at least 500 hours per year for three consecutive years (starting from 2021) to make 401(k) deferrals, beginning in 2024.
SECURE 2.0, passed in 2022, reduces the requirement to just two consecutive years for plan years beginning in 2025. This change means that employees who work at least 500 hours in 2023 and 2024 will be eligible to defer into the plan as early as 2025.
Who Becomes Eligible?
To qualify as an LTPT employee, the following conditions must be met:
– At least age 21 by the end of the relevant 12-month period.
– Completed at least 500 hours of service in each qualifying year.
– Service must be from 2021 onward to count for eligibility or vesting.
Tracking Hours – Can Your System Handle It?
Some 401(k) platforms will calculate LTPT eligibility automatically if hours are provided on a per-payroll basis. However, many systems cannot track eligibility if full census data is only submitted at year-end or if hours aren’t included.
Speak with your plan advisor, recordkeeper account manager, and/or TPA to confirm whether you need to track hours manually or whether your platform is handling this automatically.
What Happens If You Miss an Eligible Employee?
Failing to allow an eligible LTPT employee to make 401(k) deferrals is a plan compliance failure. Under IRS correction procedures (EPCRS), you may be required to make a qualified nonelective contribution equal to 50% of the missed deferral, plus any match and earnings that would have applied.
Errors can lead to costly corrections and complications in audits, so proactive tracking and communication are key.
Next Steps
Confirm how your 401(k) platform is handling LTPT tracking, review your plan document, and coordinate with your payroll provider to ensure that hours are being recorded and submitted correctly. This is a complex rule, but with proactive steps, you can remain compliant and expand retirement savings access to more of your workforce.
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This material is for educational purposes only and should not be construed as financial, legal, or tax advice. It is not intended to serve as a solicitation or recommendation for the purchase or sale of any securities or investments. The S&P 500 Index is referenced in this article for illustrative purposes and represents a widely recognized measure of U.S. stock market performance. It is not available for direct investment, as the index itself is not a security. Past performance of the S&P 500 or any other index does not guarantee future results. Please consult with a qualified financial professional regarding your personal financial situation before making any investment decisions.
Arcwood Financial, LLC., Arcwood Benefits Consulting, Inc., and Arcwood HR, LLC. (dba Arcwood) are independent companies. Arcwood does not offer legal, tax or compliance advice. Brandon Oliver is an Investment Advisor Representative offering Advisory Services through Arcwood Financial LLC. a registered Investment Advisory Firm.
