Part-Time Employees in 401(k) Plans

Part Time Employees in 401(k) PlansView This Newsletter: Part-Time Employees in 401(k) Plans

Overview:

401(k) plans cannot simply exclude all part-time employees. This newsletter explains when part-time employees must be covered by the company’s 401(k) plan.

  • Minimum Age and Service Requirements
    • 1,000 hours of service and attainment of age 21
  • Entry Date
    • Semi-annual entry is the maximum permissible
    • Example
  • Effect of a Short Service Requirement
    • The downside of including part-time employees in 401(k) plans
  • Excluding Classes of Employees
    • May exclude employees if based on objective business criteria
  • Excluding Part-Time Employees with a Fail Safe Provision
    • Allows full-time employees immediate entry, while minimizing part-time employee eligibility
  • Service Requirements for Employer Contributions
    • The plan may require a minimum number of hours of service during the plan year and/or employment on the last day of the plan year to receive an allocation of the employer contribution.
    • Example
  • Impact on ADP and ACP Tests
    • Improperly excluding part-time employees who have satisfied the eligibility requirements will cause these tests to be performed incorrectly
  • Making Excluded Participants Whole
    • Qualified plans that have improperly excluded part-time employees from participation are required to make these individuals whole.
  • Conclusion
    • Never assume that part-time employees are not eligible to participate in the 401(k) plan

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Pinnacle Plan Design is a third-party administrator (TPA) for employer-sponsored qualified retirement plans. We specialize in retirement plan design, administration and actuarial consulting. Pinnacle has a local presence in Tucson and Phoenix, Arizona (AZ), as well as Houston, Texas (TX) and Columbus, Ohio (OH), and we proudly serve businesses nationwide.

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