The SECURE Act of 2019 and its successor, SECURE Act 2.0, have fundamentally reshaped 401(k) eligibility for millions of part-time employees, offering unprecedented opportunities for retirement savings and introducing new compliance considerations for employers. This legislation addresses a long-standing gap in retirement access, recognizing the growing prevalence of flexible work arrangements.
For decades, many part-time employees found themselves on the sidelines of employer-sponsored 401(k) retirement plans, a critical tool for building long-term wealth. The traditional rules, designed for a more conventional workforce, often excluded those who didn’t meet stringent annual service hour requirements. This created a significant disparity in retirement planning opportunities, leaving a growing segment of the labor force without access to valuable tax-advantaged savings vehicles.
However, a landmark shift has occurred, bringing millions of “long-term, part-time” (LTPT) employees into the fold. This transformation began with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and was further enhanced by the SECURE Act 2.0 of 2022. These legislative changes represent the most significant update to private-sector retirement rules in decades, directly impacting how employers must structure their 401(k) plans and offering a new horizon for part-time workers’ financial futures.
The Traditional Landscape: Pre-SECURE Act 401(k) Exclusions
Before the SECURE Act, employers generally had the discretion to exclude employees from their 401(k) plans if they didn’t meet certain service requirements. The most common standard stipulated that an employee had to complete a 12-month period with at least 1,000 hours of service, in addition to reaching age 21, to be eligible to make voluntary salary deferrals.
This threshold effectively barred many part-time workers, who might consistently work fewer than 1,000 hours annually (roughly 20 hours per week), from participating in their employer’s retirement savings plan. While individual companies could offer more generous eligibility rules, there was no federal mandate to include these workers, leading to widespread exclusion.
The SECURE Act of 2019: Opening the Door for LTPT Employees
The SECURE Act of 2019 marked a pivotal change, introducing new eligibility rules specifically for “long-term, part-time” (LTPT) employees. Under these provisions, a 401(k) plan may not require an employee to complete a period of service longer than:
- The 12-month period when the employee completes 1,000 hours of service, OR
- A period of three consecutive 12-month periods during each of which the employee completed at least 500 hours of service, provided the employee has turned age 21 before the end of the third year.
For calendar year plans, the tracking of these 500-hour periods began on January 1, 2021. This means the earliest a part-time employee could become eligible solely under the SECURE Act’s LTPT rules was January 1, 2024 (after completing 500 hours in 2021, 2022, and 2023). This rule, as explained by the IRS in Notice 2020-68, mandated that employers begin tracking hours for this new purpose. You can review the full details on the IRS website.
Vesting Under the SECURE Act
While employers are not required to make matching or profit-sharing contributions for LTPT employees, if they choose to, those employees must be given credit for a year of service for vesting purposes for each 12-month period in which they completed at least 500 hours of service. Importantly, this vesting rule applies to all periods of service, including those before January 1, 2021, with some exceptions, such as years of service before the employee reached age 18. Voluntary salary deferrals, it’s worth noting, are always fully vested.
SECURE Act 2.0: Further Broadening Access
Building on the foundation of the 2019 legislation, the SECURE Act 2.0, signed into law on December 29, 2022, further expanded 401(k) eligibility for LTPT employees. Section 125 of SECURE Act 2.0 reduced the eligibility period from three consecutive 12-month periods to two consecutive 12-month periods during each of which the employee has at least 500 hours of service. This provision is effective for plan years beginning after December 31, 2024.
Crucially, for the purposes of SECURE Act 2.0’s two-year rule, 12-month periods beginning before January 1, 2023, are not considered. This means that if an employee works 500 hours in 2023 and 2024, they could become eligible on January 1, 2025. Additionally, unlike the original SECURE Act, SECURE Act 2.0’s LTPT provisions also extend to ERISA-governed 403(b) plans, widening the scope of retirement access even further. The full text of the consolidated appropriations act, including the SECURE 2.0 Act, can be found on Congress.gov.
Special Considerations Under SECURE 2.0:
- Exclusions: These rules generally do not apply to employees covered by a collective bargaining agreement, nonresident aliens with no U.S.-earned income, or certain students.
- Eligibility Date: Once an LTPT employee meets the hour requirements for two consecutive years, they must be allowed to contribute to the plan by the earlier of the first day of the plan year after satisfying the requirements or six months after the satisfaction date.
- Vesting: The rule remains consistent; LTPT employees are credited with a year of service for vesting purposes for each year they perform 500 hours of service.
- Employer Contributions: Employers are still not required to make matching or nonelective contributions for employees who become eligible solely under these special LTPT rules.
- Nondiscrimination Testing: Employers may elect to exclude LTPT employees from certain nondiscrimination and top-heavy testing purposes, reducing some administrative burdens.
Key Distinctions: Eligibility vs. Vesting and Employer Contributions
A critical nuance in these new rules lies in the distinction between eligibility to make salary deferrals and eligibility for employer contributions or vesting. While both SECURE Acts expand access for LTPT employees to contribute their own money to a 401(k) plan, they do not obligate employers to provide matching contributions, safe harbor contributions, or other employer-funded benefits to these workers until they meet the plan’s standard 1,000-hour eligibility requirement for those contributions.
Furthermore, the effective dates for eligibility and vesting tracking differ. Eligibility for salary deferrals under the SECURE Act required tracking from January 1, 2021. However, for vesting purposes, all periods of service where an employee completed at least 500 hours count, including those before 2021. This means an employer might need to retroactively credit years for vesting for an employee who only recently became eligible to contribute.
Navigating the New Rules: What Employers and Employees Need to Know
These legislative changes present both opportunities for employees and new administrative challenges for employers. For businesses, meticulous recordkeeping is paramount. Employers must be prepared to track the hours of all employees, including part-timers, to accurately determine eligibility and vesting for these specialized rules.
For Employers:
- Recordkeeping: Ensure payroll and retirement plan service providers are equipped to track 500-hour periods, especially given the differing start dates for SECURE Act (2021) and SECURE 2.0 (2023) tracking.
- Plan Amendments: Review and amend 401(k) plan documents to reflect the new provisions. For calendar year plans, the deadline to amend for the original SECURE Act was December 31, 2022.
- Strategic Decisions: Decide whether to voluntarily extend employer matching or nonelective contributions to LTPT employees. While not required, offering these benefits can significantly boost morale and aid in talent attraction and retention in a competitive labor market.
For Employees:
- Understand Eligibility: Familiarize yourself with your employer’s specific plan document and the hours you need to work to qualify for 401(k) salary deferrals.
- Evaluate Contributions: Even without an employer match, contributing to a 401(k) offers valuable tax advantages and the power of compound growth over time. Even small, consistent contributions can make a significant difference.
- Interns and Contractors: Generally, interns and part-time workers classified as W-2 employees are eligible if they meet the age and service requirements. Independent contractors (1099 workers) typically are not, as qualified plans are legally for the exclusive benefit of employees.
Why This Matters for Your Investment Strategy
The expansion of 401(k) access to long-term, part-time employees is a game-changer for retirement planning. It acknowledges the evolving nature of work and provides a much-needed avenue for millions to build financial security. For individuals, starting to save early, even modest amounts, can leverage the power of tax-deferred growth and compounding returns over decades.
For the broader economy, these acts are a significant step towards addressing the looming retirement savings gap. By empowering more workers to participate in employer-sponsored plans, it fosters a culture of saving and provides a robust framework for financial well-being, irrespective of full-time or part-time employment status. As financial enthusiasts, understanding these shifts allows us to better navigate the landscape and advocate for optimal strategies for all investors.
