Excluding part time, temporary, and seasonal employees from a company’s 401(k) plan seems pretty straightforward. After all, these employees generally work fewer hours, typically don’t qualify for health benefits, and often aren’t considered part of the company’s core workforce. So it seems reasonable that they wouldn’t be eligible for retirement benefits, right?

The answer, of course, is far more complicated.

Long-established statutes and rules governing retirement plans, as well as new legislation enacted with the passing of the SECURE Act and SECURE 2.0 Act, make excluding part-time employees much more complex than simply writing the exclusion into the document. Furthermore, incorrectly excluding employees can create compliance problems and unintentional plan failures.

Here’s what plan sponsors need to know about their part-time employees.

Statutory Requirements

Maximum Service Requirement and Fail-Safe

The maximum service requirement for elective deferrals allowed by the regulations is One Year of Service, which the law defines as 1,000 hours in a twelve-month period.  This means that any employee who works 1,000 hours during the plan’s Eligibility Computation Period (ECP) meets plan eligibility, even if they’re not considered full-time employees.

For example, say a plan has eligibility requirements of age 21 and three months of service with 88 hours of service per month. The plan sponsor needs to not only measure which employees have completed three months of service with the requisite hours per month, but they also need to watch for employees who work 1,000 hours during the ECP, even if the employee never completed three months of service with 88 hours of service per month (a “fail-safe” that automatically applies to prevent a violation of the maximum service requirement).

Disguised Service Conditions

The law does allow for certain classes of employees to be excluded from a 401(k) plan. These classes must be clearly defined in the plan document, and they must be considered reasonable classifications. Examples of acceptable class-based exclusions include union employees, leased employees, and non-resident aliens.

While other excluded classes are permissible, they generally must not discriminate in favor of highly compensated employees (HCEs) and, importantly for this discussion, cannot be based on service.

While “part-time” might be a classification for hiring purposes, job categories based on service (part-time, seasonal, temporary) can create a disguised service condition. Because these classifications are based solely on the amount of service performed by those employees, they could inadvertently violate the minimum service requirements discussed above (i.e. 1,000 Hours equals One Year of Service). In other words, any employee who completes a Year of Service can no longer be treated as an excluded employee unless they fall into a defined class exclusion that is not service based.

Long-Term Part-Time Employees

To add yet another layer of complexity to this already convoluted set of rules, the SECURE Act and SECURE 2.0 Act have now created a whole new category plan sponsors must track – Long‑term part‑time employees (LTPT).

As of January 1, 2025, employees aged 21 or older who complete at least 500 hours of service in two-consecutive 12-month periods will be considered a long-term part-time employee. As an LTPT, they must be permitted to participate in their employer’s 401(k) or ERISA-covered 403(b) plan for elective deferral contributions.

It’s important to understand that LTPT rules apply even if the employee does not meet the plan’s regular eligibility requirements.  Also, these new rules don’t eliminate the original 1,000‑hour One Year of Service maximum eligibility service requirement – they operate in addition to it.

While this mandate covers employee deferrals, it does not extend to employer contributions. Employers do have the option of allowing their long-term part-time employees to receive these contributions, but LTPT employees who receive employer contributions will vest at 500 hours of service rather than 1,000 hours.

What This Means for Plan Sponsors

Excluding part‑time, temporary, or seasonal employees isn’t simply a design decision. It’s a complex matter that can affect plan compliance and operation.

As best practice, plan sponsors must carefully track hours and monitor plan eligibility for all employees, whether full or part time, apply both the LTPT and One Year of Service 1,000‑hour mandatory thresholds, review their plan’s current employee exclusions for potentially disguised service conditions, and remove service-based exclusions in favor of clearly defined class-based exclusions.

Please reach out to your Blue Ridge Plan Retirement Plan Consultant if you have questions about your plan’s employee exclusions.