Are You Ready For The Next Big Change In 401(K) Plans Under The Secure Act?
The COVID-19 pandemic brought changes to the retirement plan industry in 2020 with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The challenges brought on by the pandemic on both business and personal levels seem to have overshadowed the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act on Dec. 20, 2019. However, it’s important not to lose sight of the SECURE Act, as proper planning is necessary in order to avoid operational errors and additional work in the future.
Recap of the SECURE Act
Under the SECURE Act, employers that sponsor a 401(k) plan must allow certain long-term, part-time
employees to make salary deferral contributions to their plan. Under the new law, employees who work 500 or more hours for three consecutive years must be allowed to defer. Years are based on the eligibility computation periods as defined by the plan, and employees will enter the plan in accordance with the plan’s entry dates. Tracking for determination of eligibility begins in 2021, which means employees within this group will not become eligible until at least 2024 regardless of years worked prior to 2021. Employees within this group must still meet any age requirements imposed by their plan.
A Closer Look at the Rule Change
This new rule applies to all 401(k) plans, except collectively bargained plans. This rule does not impact
403(b) plans, as they are already subject to the universal availability rule. If the plan’s current eligibility
provisions already allow employees in this group to participate, then no changes are needed. It is important that 401(k) plan sponsors accurately track hours for their part-time employees in order to avoid having to make corrective contributions to the plan for these employees. Plans will need to be amended for the SECURE Act by the last day of the plan year beginning in 2022.
Employees who enter the plan under these new provisions are excluded from the plan’s nondiscrimination testing, top heavy minimum contributions, and safe harbor contributions. Eligibility conditions for any employer contributions will still apply. Unless further guidance is issued to the contrary, these participants are included in the participant count, which could result in small plans becoming large plans subject to the independent audit requirement.
It is no secret that the government has endeavored for years to increase participation in workplace retirement plans, specifically for lower income workers. It remains to be seen if part-time employees will take advantage of this provision, especially since they generally will not be eligible for employer matching contributions.
For assistance or questions related to the SECURE Act or any other retirement plan issues, please contact us. Published on March 15, 2021