Do I Need to Provide a 401(k) Match for Part-Time Employees?
As a plan sponsor, you may be wondering if you are required to provide a 401(k) match for long-term, part-time employees. Although the rules and regulations of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the SECURE 2.0 Act of 2022 (SECURE 2.0) have changed the eligibility rules for long-term, part-time employees, the requirements for matching contributions have stayed the same. Read on to learn more about these provisions and why offering an employer 401(k) match can be valuable to your small business.
Long-term, part-time employee 401(k) eligibility under the SECURE Act
Historically, employers have been able to require a minimum of 1,000 hours in the eligibility computation period to meet the plan’s eligibility service requirements. This changed in 2019. Under the SECURE Act, employers that offer 401(k) plans are required to permit employees who worked for at least 500 hours in three consecutive 12-month eligibility computation periods (referred to as "long-term, part-time employees") to make elective deferral contributions into their workplace retirement plan.
Employers are required to credit an employee’s service hours starting on January 1, 2021. Therefore, the first time a long-term, part-time employee would be eligible to make elective deferrals based on the rules as defined by the SECURE Act is January 1, 2024.
How long-term, part-time employee eligibility changed under SECURE 2.0
Provisions within SECURE 2.0 modified the rules for long-term, part-time employees. Instead of waiting three consecutive 12-month periods for eligibility, an employee would only need two consecutive 12-month periods with 500 hours to be considered a long-term, part-time employee.
The SECURE 2.0 provisions state that the initial 12-month period must begin on the date the employee first begins to perform service for the employer; however, the plan may provide that subsequent 12-month periods are determined by the first day of the plan year.
Further, an employee will not enter a plan under the long-term, part-time eligibility requirements if the plan uses the elapsed time method to measure service.
- Plans that use Elapsed Time: Under this method, an employee will need to enter the plan under the plan's defined eligibility service requirements—not the long-term, part-time eligibility service requirements. An employee is eligible to participate after completing a maximum of one year of service, without regard to hours worked.
- Plans that use Hours Equivalency: The equivalency method can be used to measure service for employees to enter the plan using eligibility service requirements as a long-term, part-time employee. There are no reductions or changes to the number of hours worked that would be credited to an employee’s eligibility for participation.
Are employers required to provide a 401(k) match to long-term, part-time employees?
Although the rules and regulations for employee contributions have changed under SECURE 2.0, the rules and regulations for employer contributions have not. Employers are not required to make employer contributions (e.g., matching) for long-term, part-time employees, although they are free to do so if they choose.**
Reasons to provide a 401(k) match to long-term, part-time employees
- Recruitment and retention
One of the main reasons to offer an employer 401(k) match is to recruit and retain employees. More and more workers are increasingly concerned about their ability to save for a financially secure retirement. This is particularly true for part-time employees, who by the nature of their work hours aren’t earning as much discretionary income to invest. Offering an employer 401(k) match to part-time employees can allow them to invest their employer dollars and take home more of their own paychecks, allowing them to enjoy the 401(k) benefit while still feeling financially secure.
- Employer contribution tax benefits
One of the major tax advantages an employee may benefit from making a matching contribution is that these contributions are tax deductible. That’s right—matching contributions are deductible on your business’ federal income tax return, so long as the contributions don’t exceed the regulated limitations (see “401(k) employer contribution rules”). This is in addition to multiple other tax credits employers may receive under SECURE 2.0. Overall, offering an employer matching contribution can be a good way to provide a benefit to part-time employees while also providing tax savings for the business.
401(k) employer contribution rules
If you are considering offering a 401(k) employer match, it’s important to be aware of the 401(k) employer contribution rules.
As previously mentioned, there are certain contribution limits to keep in mind. For 2024, the total contribution limit, which includes both employee and employer contributions, is $69,000. Workers age 50 and older can add up to an additional $7,500 each year as a catch-up contribution.1
As a plan sponsor, you should also be aware of the deadline for employer contributions. It is up to the plan fiduciary—in most cases, the plan sponsor—to meet plan contribution deposit deadlines. If deadlines are missed, consequences can range from mild (e.g., losing a tax deduction) to severe (e.g., civil penalties), including disqualification if not deposited at all (if it’s a mandatory contribution). Of course, the Internal Revenue Service (IRS) will work with the plan sponsor to ensure they have every opportunity to avoid disqualification.
Employer contributions are subject to two annual deadlines. The first is the deductibility deadline. If your plan operates in accordance with the calendar year, your possible deductibility deadlines (including extensions) are below.
|
Tax Status |
Deadline |
Extended Deadline |
|
C-Corporation (or LLC taxed as C-Corp) |
April 15 |
October 15 |
|
S-Corporation (or LLC taxed as S-Corp) |
March 15 |
September 15 |
|
Partnership (or LLC taxed as a part) |
March 15 |
September 15 |
|
Sole Proprietorship (or LLC taxed as sole prop) |
April 15 |
October 15 |
The second is the annual additions deadline. According to the Internal Revenue Code (IRC), "annual additions" refers to the "total employer contributions, employee contributions, and forfeitures allocated to a participant."2 Many plans define the limitation year as the plan year.2 Annual additions deadlines vary based on the type of employer contribution.
|
Contribution type |
Allocation Deadline |
|
Safe harbor matching* and nonelective contributions |
Last day of the plan year following the plan year in which the contribution is being made |
|
Non-safe harbor matching and nonelective contributions |
30 days following the due date of the company tax return (with extensions) |
|
Contributions to correct failed plan testing - top heavy minimums, QNECs and QMACs |
Last day of the plan year following the plan year in which the contribution is being made |
Participant contributions have their own rules and deadlines.
Finally, you should understand what constitutes eligible wages as defined by the plan document. According to the IRS, allocating plan contributions based on an incorrect definition of compensation is one of the most common mistakes employers make when determining employer matching contributions.3 Typically, certain types of compensation, such as bonuses or overtime, are excluded when they should have been included, and vice versa. Review your plan document for your plan’s specific definition of compensation to ensure your employees receive the correct employer contribution amounts.
The rules and regulations surrounding employer contributions, including the employer contribution limit and whether employer contributions are taxed, can be complex. It is important to consult with a retirement plan professional and tax preparer or accountant to understand your obligations and options.
Curious about the rules and regulations involved with starting a retirement plan?
It may feel intimidating to start a 401(k) plan with all of the rules and regulations involved. When you start a 401(k) plan with Ascensus, you’ll have expertise you can count on. We offer full-service and recordkeeping-only 401(k) plans to give you the freedom to design the retirement program that will best fit your unique needs and employees. And as the nation's largest independent retirement services provider, whichever path you choose—and whatever rules and regulations are involved—our experts will be there to help guide you to success.
For more information on the provisions of the SECURE Act and SECURE 2.0, more resources for plan sponsors, or to get started with an Ascensus 401(k) plan, visit ascensus.com.
*Also applicable to ERISA 403(b) plans.
**If employers do choose to make matching contributions, vesting may have to be calculated differently for the LTPTs and former LTPTs than non-LTPT participants. Plans are limited in what they can require for LTPT vesting.
Sources:
[1] "IRS Releases 2024 Cost-of-Living Adjusted Retirement Savings Limitations." Ascensus. November 1, 2023.
[2] Internal Revenue Service. "Fixing Common Plan Mistakes – Failure to Limit Contributions for a Participant." 2024.
[3] "401(k) Plan Fix-It Guide—You didn’t use the plan definition of compensation correctly for all deferrals and allocations." Internal Revenue Service. 2024.
