How many hours do you need to work to qualify for 401k?

One of the basics of managing a retirement plan is to consider employee eligibility into the plan. Usually, for an employee to be eligible to join a 401(k) plan, they must meet the required length of service. Employers count the length of service based on the actual hours method or the elapsed time method.

Full-time employees do not have a minimum hours requirement, and most employers allow these employees to participate in the company’s 401(k) plan immediately after hire. However, different rules apply for part-time workers. For plan years after December 31, 2020, the SECURE Act requires employers to allow part-time participants to participate in the company’s 401(k) plan if they have completed at least 500 hours each year for three consecutive years.

How Employers Count Service

Employers can use the following methods to credit service for plan eligibility:

Actual hours method

This method considers the number of hours that an employee puts to work, and is entitled to receive compensation. Employers require workers to work a specific number of hours in a specific period to get credit for a year of service.

Generally, part-time employees are required to complete at least 500 hours every year for three consecutive years to be eligible to participate in the employer’s 401(k) plan. This rule does not apply to full-time employees, who become eligible to participate in the employer’s retirement plan either immediately or after a specific period based on the company policy. 

The actual hours worked method requires all employees to work an equal number of hours to get similar retirement benefits. The employer must maintain records of the actual hours that each employee injects into the company.

Elapsed time method

This method credits employees for a period of service if they were still working for the employer by the end of a specific period. For example, if an employee commences work on May 1, 2021, he/she would receive credit for a full year of service if they were still working for the employer on April 31, 2022. This method does not consider the actual hours worked during the year, and the employer does not need to log the total hours worked during a specific period.

The Equivalency method

The equivalency method is a hybrid of the elapsed method and the actual hours method. An employee who performs a service in a given week is credited 45 hours or 190 hours in a month. For an employee to be credited with a year of service, they would need to work at least an hour in at least six of the 12 months.

Do part-time employees qualify to participate in a 401(k) plan?

Prior to the SECURE Act, part-time workers who put in less than 1000 hours in a 12-month period and were below 21 years were ineligible to join a 401(k) plan. Part-time employees whose total hours worked were below the hours requirement were ineligible to participate in a 401(k) plan.

However, under the SECURE Act, non-union part-time employees who put in at least 500 hours yearly for three consecutive years are allowed to participate in a 401(k) plan. The employee must be age 21 or older.

The new SECURE Act rule for part-time employees affects employee elective contributions only. It does not mandate employers to make matching contributions to part-time employees, and employers can decide not to match retirement contributions for employees who work less than 1000 hours in a year. These employees are also excluded from safe harbor contributions until they meet the 401(k) plan’s eligibility requirement.

When Can Part-time Employees Start Participating in 401(k) Plans?

Part-time employees will qualify to join a 401(k) plan from January 1, 2020. When considering the eligibility period, employers exclude the period before January 1, 2021, and only consider the consecutive years 2021, 2022, and 2023. Therefore, employers can start tracking the actual hours worked by part-time employees starting January 1, 2021. The new SECURE Act provisions do not apply to other employer-provided retirement plans like 457(b) and 403)b) plans.

Vesting Eligibility for Part-time Workers

While employers are allowed to exclude the period before January 1, 2021 when determining employee eligibility, this does not apply to the vesting period. When determining an employee's vesting eligibility based on their years of service, the employer must include all years of service, including the period before 2021.

For example, if John works at least 1000 hours in a year starting from 2019, the matching contributions should start vesting from 2019. If the company has a five-year graded vesting schedule, the matching contributions will be 100% vested by 2023.

Employees who are not eligible to join a 401(k) plan

There are certain employees who are excluded from participating in 401(k) plans. Some of the employees who are excluded from plan participation include seasonal employees, union employees, leased employees, non-resident aliens, interns, and independent contractors.

Employers should be cautious not to exclude part-time employees who log at least 1000 hours in a 12-month period. These employees are eligible to join a 401(k) plan.