Expansion Of Plan Eligibility Under The SECURE Act: For Plan Sponsors

Dear Plan Sponsor,

On December 20, 2019, President Trump signed the SECURE Act into law. Several provisions in the Act promise to have a major impact on the structure and administration of retirement plans. One that will affect many of our clients is the expansion of plan eligibility required by the Act.

Under this provision, the SECURE Act has created a second layer of eligibility provisions for 401(k) Plans for employees who work at least 500, but less than 1,000 hours per year.

Employees who have attained age 21, and have completed 3 consecutive years with at least 500 hours in each year will be eligible for the 401(k) component of employer retirement plans. The 3 consecutive year measurement period begins this year (2021), and the first population of employees benefiting from the Act will be entering 401(k) plans on January 1, 2024.

Beginning this year, we encourage you to implement a time tracking system to prepare for what lies ahead with your retirement plan. You will be documenting actual hours worked by your steady, part-time employees, and we will retain that information on our system as well.

Items of note:

  • Employees whose plan eligibility is solely a result of the 500-hour track will be excluded from all nondiscrimination testing.
  • This population of steady, part-time employees will not be eligible for Top Heavy minimums.
  • They will not be automatically eligible for any employer based contributions in the plan as long as they retain their steady part-time status.

There are administrative details that have not yet been worked out by our regulatory agencies. The following questions will need to be addressed over the next 3 years:

  • What if a plan sponsor already has generous eligibility provisions in their plan?
  • What if a plan sponsor wishes to provide an employer contribution to this population of participants?
  • What are the 5500 filing requirements for a plan that moves into “large plan” territory as a result of this change?

From the plan sponsor perspective:

  • How will a plan sponsor keep track of dual eligibility provisions for the 401(k)?
  • If a plan sponsor offers investments through a brokerage arrangement, will their providers permit the opening of small brokerage accounts?

While there are still unanswered questions, we have 3 years to prepare as the initiative unfolds. Your Compass consultant will be ready to assist if you have any questions.

Laura K. Smoke, ERPA, TGPC, QPA, QKC, QKA
Vice President, Operations – Plan Administration
Compass Retirement Consulting Group