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SECURE Act Part-Time Employee Provision: Don’t Count Hours Unless Absolutely Necessary!

I recently attended the That 401(k) Conference in Orlando, Florida, where conference moderator, Ary Rosenbaum (who runs the amazing and informative That 401(k) Site), conducted a session on the impact of the SECURE Act. In that session, he stated that one of the biggest administrative issues created by the retirement plan legislation is the requirement to allow certain long-term part-time employee the right to make elective deferrals to 401(k) plans.

Beginning in 2024, plans will be required to permit part-time employees who work at least 500 hours in three consecutive years to make elective deferrals to the plan. This means that hours will essentially need to be counted beginning in 2021. The complex tracking of part-time employee hours will likely result in many operational errors.

By why count hours at all, if plan sponsors don’t have to? An alternative to this situation is to simply allow all part-time employees the right to make elective deferrals to the plan, instead of imposing the new service requirement. These part-time employees do not impact testing, and they don’t cost the employer any money, in the form of employer contributions, since the standard age/service requirements would still apply to employer matching and nonelective contributions. Furthermore, the likelihood of droves of part-time employees contributing to the plan is near zero, so average account balances, which drive recordkeeper pricing, should not be negatively affected (unless your recordkeeper counts zero-balance accounts toward average account balances, which it should not).

And, even in other hour-counting situations (such as tracking services for eligibility and vesting purposes), there are alternatives. In Ary’s session, he cited that equivalencies, which automatically credit employees with a certain number of hours for each period they work (e.g., day/week/pay period/month) can be a less problematic method of tracking services. Also, the elapsed time method, which credits an employee for a period of service if he/she is still employed at the end of that period, can also be used.

Plan sponsors should understand that there are other options to counting hours and even the ability to avoid counting them all together. And, for those who do count hours, keep in mind that it can be a difficult operational process, so it is important to be doing it correctly!

Do you feel that counting hours is a good thing or do you dislike it? Feel free to share your thoughts with me on LinkedIn, Twitter or at info@cammackretirement.com.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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