Part Time Participation

The House recently passed the SECURE Act, which contains significant retirement-related amendments that would have widespread impact on taxpayers’ retirement planning initiatives. One of those amendments would change the current rules governing participation of part-time employees in employers’ 401(k) plans. Under current law, part-time employees who work less than 1,000 hours per year for an employer can usually be excluded from participation in that employer’s 401(k). The SECURE Act would change that rule and require either a one-year of service requirement where employees work at least 1,000 hours during that year to gain eligibility or a three-year of service requirement where employees work at least 500 hours for each of three consecutive years.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the potential impact of this change to the 401(k) eligibility rules.

Their Votes:

Bloink

Byrnes

Their Reasons:

Below is a summary of the debate that ensued between the two professors.

Bloink: This change to the 401(k) rules is an important step toward ensuring equality in 401(k) participation eligibility and also a valuable way to encourage greater levels of retirement savings among the taxpayers whose only realistic savings option may be the employer-sponsored plan. Part-time workers should not be prohibited from participating in a valuable employer-sponsored 401(k) simply because the employer only employs them on a part-time basis.

Byrnes: The reality is that the tax code currently allows employers to exclude part-time workers from 401(k) participation because of the administrative difficulties that would arise if the employer was required to include every single worker in this employment benefit arrangement. Requiring an employer to allow participation for employees with as few as 500 hours worked per year would make these plans substantially more difficult for the employer to administer, meaning that some employers might forgo offering the savings option in the first place.

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Bloink: Requiring employers to allow part-time employees to participate in 401(k) savings options would create additional administrative burdens, but burdens that are well worth it in the long run. Part-time employees are often women who work on a part-time basis to care for family or lower income workers who simply cannot find full-time employment with any single employer. Giving these employees—who are also valuable to the employer from a business perspective—savings options promotes equality and will help everyone in the long run.

Byrnes: Many small business owners employ workers on a part-time basis because they only need those employees on a part-time basis, or because they don’t have the revenue necessary to provide comprehensive employment benefits to more expensive full-time employees. This provision increases the cost to employers in such a way that I actually think we will see less savings options for employees of small business owners in the long run.

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Bloink: Excluding part-time workers who have worked with the employer for a certain period of time is essentially a method of backdoor discrimination. We have extensive rules preventing discrimination of non-highly compensated full-time employees. Allowing the employer to simply employ multiple part-time employees basically gives the employer the option of excluding non-highly compensated employees from participation entirely, and so circumvent the nondiscrimination rules that provide important safeguards under current law.

Byrnes: Small business owners are under no obligation to offer employees a 401(k) savings option. These business owners have various retirement savings vehicles at their disposal that are less expensive to administer and can be established solely for the employer, to the exclusion of all employees. If 401(k) plan options are prohibitively expensive, we’re providing an incentive for these employers to shift their savings options away from providing for both employee and owner, and providing a disincentive for more widespread savings.