SECURE Act: New part-time eligibility rules for 401(k) plans
In 2020 and prior years, Solo 401k plans could exclude part time W-2 employees who worked less than 1,000 hours from participating in a 401k plan. This all changes for both full-time employer 401k plans and owner-only Solo 401k plans starting on January 1, 2021.
The SECURE Act
Stemming from the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), Solo 401k plans will be impacted by the three years, part-time (500 but less than 999 hours) employee rule that will allow part-time employees to choose to make employee elective contributions to the company-sponsored 401k plan.
2020 and Prior
Before the passage of the SECURE Act, non-owner W-2 employees (common law employees) who worked less than 1,000 hours during the plan year could be excluded from having the option to participate in a 401k plan and thus did not impact the owner-only businesses from setting up a Solo 401k plan. Only those years after 2021 are counted.
2021 and Future Years
The three year provision is effective for the 2021 plan year, but years before 2021 do not count for purposes of counting the three-year eligibility.
Long-Term, Part-Time Employee
A W-2 employee will be deemed a long-term, part-time employee once he or she completes 500 hours of service/work in three consecutive 12-month periods.
Does the SECURE Act nullify the 1,000 hours of service per year rule?
No. 401k plans must now have dual eligibility requirements. An employee can become eligible for the plan by fulfilling either: (a) the one year of service requirement (1,000 hours of service in one year), or (b) the three years of service requirement (at least 500 hours of service for three consecutive years).