Many defined contribution (DC) plan sponsors may think that they can automatically exclude part-time workers from the company’s retirement plan. Companies need to understand that part-time workers that meet minimum work requirements cannot be excluded or, the plan documents may allow for part-time workers. Failure to include eligible part-time workers can result in significant fines by the IRS.
If the part-time worker has put in at least 1000 overs over the course of the plan year, which equates to about 19 hours per week, then they are eligible to participate in the DC plan. Non-resident aliens and union workers may be excluded. Plans can include part-time workers with less than 1000 hours but many times the plan sponsor’s administrative personnel may not be aware of these more lenient restrictions in the plan documents when they inherit the plan. The key here is using a good service provider and advisor that should remind the new person in charge of the plan about more lenient restrictions in the plan’s documents. If violations are uncovered, the plan should enroll these part-time workers within three months and make non-elective contributions.
An HR executive at a recent TPSU program in Huntsville discovered that the company was improperly excluding part-time workers when a full-time employee decided to work part-time. After consulting with their TPA thinking that the worker would not be eligible to participate in the plan, the TPA informed the HR professional that the plan documents allowed for part-time workers. The company then had to do an investigation to determine how many other workers had been improperly excluded, hire an ERISA attorney and file a voluntary correction with the IRS. They face hundreds of thousands of dollars in reimbursements and fines.
An Arizona based TPA recommends:
A plan sponsor should never automatically assume that part-time employees are not eligible to participate in its 401(k) plan. Plan document provisions should be reviewed and administrative practices put in place to ensure part-time employees who meet the minimum service requirement are timely enrolled in the plan.
If it is discovered that part-time employees have been improperly excluded, the plan sponsor should consider using the IRS pre-approved program to correct the failure and make the participants whole to avoid stiff penalties or possible plan disqualification.
