Can Part Time Employees Contribute to 401k?

A 401(k) plan serves as a foundational tool for retirement savings, allowing individuals to contribute a portion of their earnings on a tax-advantaged basis. Many commonly associate these plans primarily with full-time employment, assuming that part-time workers are often excluded from such valuable benefits. However, legislative changes, particularly the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the SECURE 2.0 Act of 2022, have significantly broadened access to 401(k) plans for a wider range of employees. These acts introduced new provisions aimed at ensuring that long-term part-time workers also have the opportunity to participate in employer-sponsored retirement savings.

Eligibility for Part-Time Employees

Federal regulations now mandate that employers sponsoring 401(k) plans allow certain long-term part-time (LTPT) employees to make elective deferrals. This eligibility is determined by specific hour and age requirements, which have been updated by recent legislation. Under the SECURE Act 1.0, an employee was considered an LTPT employee if they worked at least 500 hours but fewer than 1,000 hours per year for three consecutive 12-month periods. This rule meant that 2024 was the first year employees could become eligible under these initial provisions, as service counted from January 1, 2021, onward.

The SECURE 2.0 Act of 2022 further refined these requirements. Beginning with plan years starting in 2025, the consecutive service requirement for LTPT employees is reduced from three years to two years. This means an employee working at least 500 hours but less than 1,000 hours in two consecutive 12-month periods will become eligible to make elective deferrals. In addition to the hour requirement, an employee must also be at least 21 years old by the end of the specified eligibility period.

Meeting these criteria means the employer must permit the LTPT employee to contribute their own money to the 401(k) plan. It is important to note that these are federal minimum eligibility standards. Employers retain the flexibility to offer more generous terms, such as allowing part-time employees to participate sooner or with fewer hours. Service periods before January 1, 2021, are not considered when determining LTPT eligibility.

Employer Considerations for Part-Time Employees

While LTPT employees must be allowed to make elective deferrals, employers are not automatically required to provide matching or profit-sharing contributions for them. Employer contributions typically remain contingent on the employee meeting the plan’s “normal” eligibility requirements, which often include completing 1,000 hours of service within a 12-month period.

Employers face an administrative responsibility to accurately track the hours worked by their part-time employees to determine LTPT eligibility. For example, an employee who works 500 hours in 2023 and 500 hours in 2024 would meet the SECURE 2.0 two-year requirement for 2025 plan year eligibility.

Even for plans structured as Safe Harbor 401(k)s, which typically involve mandatory employer contributions to simplify compliance with certain non-discrimination tests, employers can exclude LTPT employees from receiving these specific employer contributions. This exclusion does not jeopardize the plan’s overall safe harbor status. Similarly, LTPT employees can be excluded from certain non-elective contributions or profit-sharing allocations if those contributions are conditioned on meeting the plan’s standard 1,000-hour service rule.

Contributions and Vesting

Once a part-time employee meets the eligibility criteria and begins participating in a 401(k) plan, their ability to contribute is subject to the same limits as full-time employees. For 2025, the elective deferral limit for employee contributions to a 401(k) plan is $23,500. Employees aged 50 and over can make additional catch-up contributions, which for 2025 is $7,500, allowing a total contribution of up to $31,000 for most participants. A higher catch-up contribution limit of $11,250 applies for those aged 60-63 in 2025, if the plan adopts this provision.

Employee contributions, also known as elective deferrals, are always 100% vested, meaning the employee immediately owns all funds they contribute to their account. If an employer chooses to make matching or profit-sharing contributions for eligible part-time employees, these employer contributions are subject to a vesting schedule. Common vesting schedules include cliff vesting, where an employee becomes 100% vested after a specific period, such as three years, or graded vesting, where ownership gradually increases over several years, for example, 20% per year over five years.

For LTPT employees, years of service counted for eligibility (i.e., years with at least 500 hours) must also count towards vesting for any employer contributions. Even if an LTPT employee did not receive employer contributions during their initial years of part-time service, those years still accumulate for vesting purposes. Consequently, if an LTPT employee later meets the plan’s normal 1,000-hour requirement and begins receiving employer contributions, their prior part-time service can accelerate how quickly those contributions become fully vested.