If You Have Part-Time Employees and a 401(k) Plan: This is a Must Read
Did you know you may soon have to allow your part-time employees to participate in your 401(k) plan?
Your 401(k) plan might be small but, unfortunately, as a business owner you’re generally subject to the same rules and regulations handed down by the IRS and Department of Labor as a Fortune 500 company. There’s so much to weed through, let us help you.
Is your business ready for the new part-time employee 401(k) rules?
The Secure Act was an extensive piece of retirement related legislation that passed in the wee hours of 2019, right before we ran headlong into a pandemic. No wonder many people forgot about it! One of the provisions of this act that has the potential to have an impact on employers is the requirement that beginning in 2024, you may have to allow long-term part-time employees to participate in your retirement plan if they wish.
Historically many employers have excluded part-time employees from participating in their 401(k) plans for a variety of reasons including costs and administrative burden. The Secure Act, however, was squarely aimed at expanding access to retirement for all Americans and that includes your long-term part-time employees.
If an employee works for your company for three years, working 500 hours or more each year, effective January 1, 2024, they must be allowed to participate in your retirement plan with their own contributions. Some parts of the provision were included to lessen the burden on employers, including no requirement to provide these employees with employer contributions (matching, profit sharing, etc.), and the option to exclude from year-end compliance and discrimination testing. There are also some plans that are exempt, such as 403(b) plans, and be prepared that the IRS is expected to come out with further guidance.
What should you be doing in the meantime?
If you have part-time employees, you need to be tracking their hours worked back to January 1, 2021. Beginning January 1, 2024, you must offer enrollment to any employee who is at least age 21 and worked a minimum of 500 hours over three consecutive years. Note, it’s not a one-time event, you’ll have to continue tracking your part-time employee hours and offering them enrollment in the plan upon their completion of three years.
Why should you care?
If keeping your retirement plan in compliance isn’t enough of an incentive for you, there could be financial implications for not complying. When an employer does not offer eligible employees an opportunity to enroll in their plan at the appropriate time, they may be subject to making contributions on behalf of the employee to make up for the lost opportunity. Depending on the extent of the issue, you could also end up with additional IRS fees and penalties— and considerable costs to fix this easy to avoid mistake.
Offering a retirement plan to your employees is a great benefit and retention tool, especially in these days of the great resignation. However, running a retirement plan is not something you should attempt on your own. Reach out if we can help you or connect you with resources to support you and your employees.