Do Employers Have to Offer 401(k) Plans to Hourly Employees?

Employers vying for talent actively explore strategies to improve employee retention and satisfaction.

This has resulted in a tangible financial gain for part-time employees and interns: employers are increasingly giving 401(k)s to these workers, which was far less prevalent in previous decades.

A well-managed 401(k) plan with high employer matching benefits is a compelling incentive for many employees to work for a certain firm.

While there is presently no legal need for businesses to have a 401(k) plan, if they do, they must follow tight guidelines about which workers are eligible to enroll.

Let’s find out more about the laws that businesses must go by and how they could alter in the years to come.

401(k) Plan: What Is It and How Does It Work?

A 401(k), which is a retirement saving and investing plan, allows employers to participate. Contributions made by employees to 401(k) plans are tax deductible.

Automatic withdrawals of contributions are made from employee paychecks and invested in funds of the employee’s choosing (from a list of available offerings).

The catchy name comes from the clause of the tax code that established this kind of plan, particularly subsection 401(k). Employees who sign up for automatic paycheck deductions make contributions to individual accounts.

Depending on the kind of plan you have, the tax savings either take place when you make contributions or when you take money out in retirement.

So with this plan, you won’t have to think about credit cards with $10,000 limit guaranteed approval when you’re old, because you’ll have money when you saved when you were younger.

Do Employers Have to Provide a 401(k) Plan?

While many firms now provide 401(k) plans to their workers, it is not required by law. In 2020, 67% of private-sector employees had access to a 401(k) or other defined contribution retirement plan, according to the U.S. Bureau of Labor Statistics.

Employers that wish to provide a 401(k) plan may do it in a variety of ways. Employees may be provided 401(k) plans different than standard 401(k)s, such as ones created particularly for small enterprises.

Another kind of 401(k) plan is the safe harbor 401(k) plan (k). Employers may circumvent the nondiscrimination requirements that typical 401(k) plans are required to satisfy.

Nondiscrimination tests guarantee that programs do not favor highly paid employees over other employees. Safe harbor arrangements are also simpler to manage for small firms.

Who is Eligible For a 401(k)?

To be eligible for 401(k) benefits under a corporate plan, you must be legally categorized as an employee.

Remember that collecting 401(k) benefits entails being legally classified as an employee. Non-employees such as consultants, contractors, and 1099 workers are ineligible to participate in qualifying plans since they are required by law to be for “the sole benefit of employees.”

According to the SECURE Act, long-term, part-time workers who clock at least 500 hours over three years are eligible to participate in 401(k) programs.

Part-time workers who were previously disqualified because they had not completed a year of service will now be eligible.

Part-time employees who are at least 21 years old and work at least 1,000 hours per year were already qualified previous to the 2019 law.

Because of the new three-year eligibility condition, persons working 500 to 1000 hours per year will not be eligible until at least 2024. This is because 2021 is the first year that may contribute to it. As a consequence, firms should begin logging the hours of their part-time workers, if they haven’t previously.

Does the SECURE Act Void the 1,000-Hour-Per-Year Rule?

No, 401(k) plans are now required to include dual eligibility criteria. One of the two service requirements — one year of service (1,000 hours in one year) or three years of service — must be satisfied before an employee is qualified for the plan (three years of service with a minimum of 500 hours).

When should we make changes to our 401(k) plan?

While service in plan years starting before 2021 is not required to be included for qualifying reasons, it is unclear when a plan must start calculating service for vesting purposes.

On this issue, more advice from the Internal Revenue Service is required. As a result, plan administrators should monitor part-time employee hours in 2020 to ensure compliance with the new standards.

As a general rule, plans for calendar years must be updated by December 31, 2022.

If you are afraid to use this kind of program, then you should not, because more and more people are starting to use it and invest their assets.

Overall, from 2000 to 2021, the value of retirement assets in 401(k) plans increased in the United States, reaching a value of around $7.26 trillion at the end of the second quarter of that year. The majority of the assets in the 401(k) plan were invested in mutual funds.

Value of retirement assets in 401(k) plans in the United States from 2000 to 2nd quarter 2021, by type of investment

When Could Employees Start Taking Money from Their 401(k)?

According to Internal Revenue Service (IRS) standards as of 2022, you may begin withdrawing from your 401(k) without penalty or having to pay extra taxes on that money when you are 59,5 years old.

You may also postpone accepting distributions until you reach the age of 72 when you must begin receiving a required minimum distribution (RMD) from classic plans.

Conclusion

Employers often provide 401(k) plans to help recruit and keep outstanding employees. However, there is no legal need for employers to have one, and many, especially smaller businesses, do not.

If a firm does provide a 401(k), it must adhere to specific guidelines about when workers are eligible to join.

These laws fluctuate based on whether the employee is full-time or part-time, as well as the service needs of the employer.