Can Part Time Employees Contribute to 401k and How It Works

Part-time employees can indeed contribute to a 401(k) plan, but there are some nuances to consider.

To be eligible, part-time employees typically need to work a minimum of 1,000 hours per year, which is equivalent to about 20 hours per week.

The IRS sets this threshold, and it's a one-time requirement, not an ongoing condition.

Once eligible, part-time employees can contribute to a 401(k) plan just like their full-time counterparts.

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To be eligible for a 401(k) plan, an LTPT employee must complete at least 500 hours of service every 12-month eligibility service computation period over three consecutive years.

This eligibility service window applies to plan years beginning after December 31, 2020, and excludes service before that.

LTPT employees can become eligible for 401(k) provisions in as little as two consecutive years if the plan year begins after December 31, 2025.

Employers may also require a dual eligibility requirement, where an employee must complete either a one-year of service requirement (1,000 hours of service during the 12-month eligibility service computation period) or the required consecutive years of service.

The maximum allowed eligibility age is the later of 21 or completion of a 12-month period during which the employee has at least 1,000 hours of service.

The LTPT rules are designed to help more part-time workers save for retirement, while not affecting a plan's nondiscrimination testing.

Discover more: Internal Revenue Service 401k

Eligible LTPT employees can contribute to a 401k plan if they complete at least 500 hours of service in each 12-month eligibility service computation period over two consecutive years.

Plan sponsors can determine eligibility for their LTPT employees by reviewing their procedures or consulting with their payroll provider. New LTPT employee information may be required to be sent to Fidelity, and payroll providers should continue to send eligibility information for full-time employees.

Fidelity's best practice is to exclude LTPT employees from receiving employer contributions unless directed otherwise. Plan sponsors using Fidelity's Employer Contribution Calculation service will need to provide direction to make changes to their current employer contribution calculation.

NetBenefits has been updated to reflect generic participant information based on plan design. Fidelity Vesting service is being updated to review an employee's service history once they satisfy the LTPT eligibility provision.

Here are the data requirements for Fidelity's Eligibility Tracking service:

The plan may also be required to send a new LTPT Employee Attained Years value, when applicable.

Part-time employees can indeed contribute to a 401(k) plan, but there are some limitations to consider. According to the IRS, part-time employees who work at least 1,000 hours per year are eligible to participate in their employer's 401(k) plan.

One key benefit of contributing to a 401(k) plan is the potential for employer matching, which can significantly boost your retirement savings. In fact, a study found that employees who participate in a 401(k) plan with employer matching contribute an average of 10% more to their retirement accounts.

By contributing to a 401(k) plan, part-time employees can take advantage of tax benefits and potentially grow their retirement savings over time.

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401(k) plans must define the dates an employee can enter after meeting any age or service requirements. These plan entry dates apply to LTPT employees too.

LTPT employees are subject to the same plan entry dates as other employees, so it's essential to understand these dates to plan your retirement contributions effectively.

401(k) plans must define the dates an employee can enter after meeting any age or service requirements. These plan entry dates apply to LTPT employees too.

If this caught your attention, see: Break in Service Rules 401k

LTPT employees have some restrictions on their contributions. LTPT employees can contribute up to the 402(g) limit, but that's it.

They can't make catch-up or Roth contributions, and they might not receive employer contributions, including safe harbor contributions.

If you're an LTPT employee, you're allowed to contribute pre-tax elective deferrals, but that's the extent of your contribution options.

The good news is that plan sponsors can choose whether to include or exclude LTPT employees from receiving employer contributions. Fidelity's best practice is to exclude them unless directed otherwise.

Here are the data requirements for Fidelity's Eligibility Tracking service:

Plan sponsors using Fidelity's Employer Contribution Calculation service will need to provide direction to include or exclude LTPT employees from receiving employer contributions.

Effective communication is key when implementing changes to a retirement plan, especially for part-time employees with fluctuating hours. Clear communication is crucial to educate employees about the changes and their eligibility for the retirement plan.

Plan sponsors must develop a communication strategy to inform both full-time and part-time employees about the changes. Communication is a vital part of adapting to the new rules.

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The new mandate requires 401(k) plans to allow employees who have worked at least 500 hours in three consecutive years to make elective deferrals to the plan.

Employees who meet this requirement must be allowed to make salary deferrals into the employer's 401(k) plans starting with the first plan year beginning on or after January 1, 2024.

The three-year measurement period is reduced to two years for plan years beginning in 2025 and later, thanks to SECURE 2.0 of 2022.

Employers can rely on the proposed regulations issued by the IRS on November 27, 2023, to apply the LTPT employee rules until the final rules are issued.

This means that employers must update their 401(k) plan rules to include part-time employees who meet the 500-hour requirement, starting in 2024.

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