Preparing for the SECURE Act’s impact on 401(k) eligibility

Do you have clients that are in for a rude awakening come 2023?

Let me explain. It seems the retirement industry has been relatively quiet on preparing businesses for SECURE Act eligibility changes. As of January 1, 2021 (for calendar year plans), the law expanding access to qualified plans for long-term, part-time employees went into effect. However, we are still awaiting guidance on implementing these changes from the IRS, and most plan document providers have not released interim amendments covering these changes. Depending on an upcoming vote in the Senate, changes will be implemented on either January 1, 2023 (SECURE Act 2.0) or January 1, 2024 (the original SECURE Act).

While further changes may come sooner with the recent congressional activity around SECURE Act 2.0, I will focus on the broad impact of the SECURE Act on eligibility. Have you been actively having these conversations with 401(k) plan clients? Here are a few questions that need to be posed:

What is this long-term, part-time eligibility change?
Historically, statutory maximums for an employee joining a 401(k) plan were as follows: age 21; one year with 1,000 hours of service; and entry to the plan within six months of meeting age and service requirements.

Read more: Why good retirement planning is about much more than money

For companies with employees who consistently work fewer than 20 hours per week, experience frequent turnover or primarily perform seasonal work, that statutory maximum provided a way to keep administrative efforts and costs down.

Beginning in 2021, the SECURE Act added a secondary maximum: if employees don’t meet the above year-of-service requirement, they will be permitted to join the plan once they work three consecutive years with 500 or more hours of service. Entry dates still can be applied (at least semi-annually), as can plan age requirements. If SECURE Act 2.0 passes the Senate, the provision as written would further reduce this requirement from three years to two.

The new requirement is intended for employees who meet this metric to be able to start saving in a 401(k) plan. This does not necessarily mean the employer is required to provide the employee with matching or other employer contributions.

However, the vesting requirements can get rather cumbersome. If employer contributions are provided to these employees, clients may need to review hours history dating back before 2021. Vesting may be credited for years with 500 or more hours of service, even if they normally require 1,000 hours to earn vesting credit.

Read more: Now is the time to auto-enroll in retirement savings

What should companies be thinking about?
If a company has an established 401(k) plan and currently uses the “one year of service” rule for some or all employees until they meet statutory requirements, then there are a few key questions to consider to determine how they can prepare for the upcoming changes.

Does the employer have clear records of hours for all employees, and have these been communicated to service providers? Have service providers been actively tracking hours for this requirement since January 1, 2021? Has the employer changed service providers, like payroll systems or 401(k) recordkeepers?

If a company has changed service providers since early 2021, the two- or three-year tracking requirement does become complicated. The requirement to track consecutive years with at least 500 hours of service begins in 2021, so now is the time to confirm that hours records are in good order. Any changes to service providers will need a historic review and transfer of records. This tends to be complicated even before the current three-year rule, so consider how to best maintain and transfer records, if necessary. Note that if special vesting requirements come into play, the historic records may need to go even further back.

One approach to lessen the administrative burden of tracking two hours-based rules over a longer time frame is to use elapsed time for eligibility purposes. Clients still may hold out employees for up to 12 months, though rehired employees are often credited with the gap period when rehired less than a year after termination.

Read more: Ask an Adviser: How can compliance test reviews be less overwhelming?

They also may consider allowing all employees to participate in their savings plan right away; which may alleviate typical testing and cost concerns. This will allow more people in and encourage savings, meaning the plan is less likely to become top-heavy — requiring employer contributions.

Annual testing for employee deferrals and employer match can ignore employees allowed into the plan with fewer than a year of service. Vesting schedules can encourage long-term commitment to the company, and reduce long-term employer cost. Finally, force-out provisions can help push small accounts for terminated employees to default IRAs, reducing the annual cost of maintaining accounts for high turnover employee groups.

The new 401(k) eligibility rules are upon us: it’s time to expand workplace savings plans to include loyal part-time employees with the company for the long haul. By expanding savings options to all employees, we can improve savings outcomes and reduce administrative burden for our clients.