You may have heard of the new federal SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019). It passed Congress and was signed into law in 2019 with broad bi-partisan support for updating US retirement plan laws.
There are multiple new features in the SECURE Act. One expands 401(k) access to many long-term part-time employees. Starting in 2021, part-time employees who either work 1,000 hours throughout the year or who have three consecutive years with 500 hours of service per year will be eligible to save for retirement through an employer’s 401(k) plan. Employers can still include a minimum age requirement of 21, however, so the youngest workers probably will not be covered.
The SECURE Act also doesn’t require that employers contribute an employer share for eligible part-time employees. That means that eligible part-time employees are free to contribute to their 401(k) from their own funds, but employers aren’t required to match.
Even with those limitations, the new rule will give many part-time employees a way to save for retirement that they didn’t have before. The U.S. Bureau of Labor Statistics estimates that about 3.5 million part-time workers will be able to take advantage of this new rule. The Bureau also states that about 21% of Americans have one or more part-time jobs. The Bureau’s data shows that women are about twice as likely to have part-time jobs as men, in part because of balancing work with family needs.
The SECURE Act does a few things to encourage employers to have 401(k) plans and to deal with the increased administration from having more plan participants. First, employers will have simplified regulations for having a valid plan, called “testing” in 401(k) lingo. Second, employers who set up a new 401(k) plan will be eligible for a tax credit. Third, employers will receive a tax credit if they automatically enroll eligible employees, to encourage greater participation. Employees who are automatically enrolled can opt out if they choose. However, studies show that few employees actually opt out from automatic enrollment. Employees are more likely to participate in a 401(k) plan if they are automatically enrolled than if they have to take the initiative themselves to enroll.
Because many part-time workers balance family responsibilities, they (along with their full-time colleagues) will like another feature of the SECURE Act. It allows an employee to withdraw up to $5,000 penalty-free from their 401(k) within a year of the birth or adoption of a child to help with the expenses from that event. The downside to that flexibility is that those withdrawals are handy now but deplete retirement savings you may be counting on for later in life.
Since only 55% of the adult population participates in any kind of retirement plan, according to the US Bureau of Labor Statistics, the SECURE Act aims to increase participation and the rate of savings. Adding long-term part-time employees to 401(k) plans is an important part of that approach.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough. She can be reached at (919) 732-7300 or firstname.lastname@example.org.