401(k) benefits for part-time employees and interns

Employers competing for talent intentionally may seek out ways to increase employee retention and happiness. That has led to some companies taking certain employee benefits that were traditionally reserved for full-time employees and extending them to part-time employees and interns. One major example of that is how more and more companies are now offering 401(k)s to these types of workers.

This is great news, given that many interns and part-time employees may make less than their full-time counterparts. Offering a 401(k) is a smart business decision for the employer, but also a powerful benefit to offer employees better financial stability.

With the enactment of The Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, along with SECURE 2.0, in December 2022, employers are now required to extend plan participation to certain part-time employees that qualify as “long-term, part-time” (LTPT) employees under the new rules. 

It’s important to note that being legally classified as an employee is required to receive 401(k) benefits. Generally, non-employees—including consultants, contractors, and 1099 workers—cannot participate in a qualified plan such as a 401(k) or 403(b) because eligibility rules state qualified plans are legally required to be for “the exclusive benefit of employees.” 

This article clarifies what will be helpful to companies with part-time, full-time, and interns who are W-2 employees, rather than companies who work only with 1099 consultants and freelancers who aren’t eligible for the qualified 401(k) plan.

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Do interns and part-time employees qualify for a 401(k)?

Interns and part-time employees are allowed to participate in a 401(k) program if they meet plan eligibility requirements. An employee may generally participate in a qualified 401(k) plan if they meet the following conditions:

• Age requirement: The employee must be at least 21 years old.

• Service requirement: The employee has worked at least one year of service (as defined below) or at least 500 hours in three consecutive years starting in 2024. SECURE Act 2.0 reduces the three-year requirement to two consecutive years starting in 2025. Refer to the section below (Expanded eligibility for LTPT) for more details on these rules.

While many 401(k) providers don’t offer a lot of wiggle room when it comes to adjusting eligibility periods and age requirements (e.g., less than one year and 1,000 hours of service), Human Interest offers custom plan design. The team at Human Interest can also help consult on the compliance and legal impact of these custom requests.

Read more about how the SECURE Act affects employers and part-time employees.

Expanded eligibility for long-term, part-time employees

The SECURE Act enacted in December 2019, and the SECURE Act 2.0 enacted in December 2022, expanded eligibility for LTPT employees. Prior to this legislation, part-time employees could generally be excluded from participation in the plan if they did not work 1,000 hours in any 12-month eligibility computation period. 

Effective in 2021, 401(k) plans must allow employees to participate in the plan if an employee works at least 500 hours in three consecutive 12 month periods and meets the applicable age requirements. Employers must count service starting in 2021 and therefore, the first time an employee may be eligible based on SECURE’s LTPT rules is January 1, 2024. 

SECURE 2.0 amended these rules to further reduce the eligibility period for LTPT employees. Effective in 2025, 401(k) plans and ERISA 403(b) plans must allow employees to participate in the plan if an employee works at least 500 hours in two consecutive 12 month periods.

Is providing a 401(k) plan to interns and part-time employees worth it?

From a recruiting and retention standpoint, it’s worth it to offer part-time employees and interns the option to participate in your company’s 401(k) plan. The tax benefits alone are very cost-effective, but providing this type of benefit demonstrates your commitment to all employees, regardless of their title or classification. Given today’s retirement crisis, many people just entering the workforce — or working fewer hours — are worried about their retirement in a way that previous generations weren’t.

At the same time, it’s more likely that part-time employees and interns won’t be earning as much discretionary income that they can use to make investments in their 401(k). According to the United States Department of Labor, “interns in the for-profit private sector who qualify as employees rather than trainees typically must be paid at least the minimum wage and overtime compensation for hours worked over forty in a workweek.” While most interns are being paid for their time, the amount they can contribute to their retirement may be minimal after deducting standard living expenses.

The same goes for part-time workers. Depending on their position and the number of hours they work, they may or may not have discretionary income to invest. Even when provided with an option to invest in the 401(k) plan, they may not have the ability to take advantage of the benefit. Some people also argue that minimum-wage workers who are offered 401(k) plans may be more likely to withdraw the cash to meet immediate financial needs, and would be required to pay tax penalties due to the early withdrawal.

Employers can support employees regarding these issues in a few ways:

• Offer financial literacy training and resources to help employees learn how they can budget and save for their retirement. Even helping employees understand the basics of 401(k) plans can be beneficial, from vesting and salary deferrals to the new rules around contribution limits.

• Provide a company 401(k) match so that employees don’t have to contribute out of their own paychecks. This is a good way to “raise” employees’ pay thanks to tax savings, while also being cost-effective for the company due to tax deductions.

Questions a business should consider before including or excluding employee groups from the 401(k) plan include:

• Are there cost savings generated by excluding or including employees from the plan? Are the savings significant or minimal?

• How will inclusion or exclusion impact recruiting, retention, and employee engagement efforts?

• Are my competitors offering a 401(k) plan benefit to their part-time employees and interns?

• Will the inclusion of these groups impact any required employer contributions as they relate to nondiscrimination testing and safe harbor matches?

• Does excluding these categories of employees significantly simplify 401(k) plan administration?

• Can your budget handle the additional financial impact if there are employer match contributions in place?

• What impact will offering this benefit have in terms of positive brand awareness and employer-of-choice recognition?

As long as a 401(k) plan meets applicable participation and coverage requirements (which include the newest participation requirements as outlined in SECURE and SECURE 2.0), an employer is not required to include all employees in the 401(k) plan. Employers should use caution when limiting coverage — excluding employees may have a severe, negative impact on employee engagement which may increase costs rather than save them.

Related articles:

• 401(k) for restaurant owners

• Hiring interns for your small business: Legal restrictions and best practices

• A Guide to Common Qualified Plan Requirements (IRS.gov)

If you’d like a walk-through of the various 401(k) options available for businesses that employ part-timers and interns, request more information from Human Interest.

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FAQs about 401(k) plans for part-time employees and interns

How does vesting work in 401(k) plans for part-time employees and interns?

Vesting in 401(k) plans for part-time employees and interns typically follows similar principles to those for full-time employees, but there may be differences based on the plan's specific terms and the employer's policies.

For part-time employees and interns, the vesting schedule determines when they become entitled to the employer's contributions to their 401(k) accounts. The schedule usually spans several years. It’s set up this way to encourage employees to remain employed at the company for a longer period of time.

It's crucial for part-time employees and interns to understand their plan's vesting schedule, as leaving the company before becoming fully vested may result in forfeiting a portion or all of the employer's contributions. In contrast, once an employee is fully vested, they have complete ownership of the employer-contributed funds, and those funds are portable, even if they change jobs. 

If an employer provides long-term, part-time participants with employer contributions as outlined above, for vesting purposes, a year of service is considered a 12-month period during which the employee earns at least 500 hours of service (as opposed to 1000 hours of service under the current rules).