What Is the 1000-Hour Rule for Retirement Plans?

The 1000-hour rule, established by the Employee Retirement Income Security Act of 1974 (ERISA), sets a minimum participation threshold for many employer-sponsored retirement plans. It dictates that an employer cannot withhold participation from an employee who works at least 1,000 hours in a designated 12-month period. This ensures that employees with significant service are given access to retirement savings. Employers can have less restrictive requirements for eligibility, but not more.

Defining an Hour of Service

An “hour of service” is the unit for measuring an employee’s eligibility under the 1000-hour rule. The Department of Labor’s definition includes not just the time an employee is actively working, but also hours for which they are paid but not performing duties. These non-working paid hours can include:

• Vacation
• Holidays
• Sick leave
• Jury duty
• Military duty
• Periods of disability

To track hours, employers can use a few approved methods. The ‘actual-hours method’ requires counting every hour worked and every hour of paid leave. This approach offers precision but can be administratively complex.

Alternatively, employers can use equivalency methods to simplify record-keeping. The ‘days-worked equivalency’ credits an employee with 10 hours of service for any day they work at least one hour. The ‘weeks-worked equivalency’ credits an employee with 45 hours of service for any week they perform at least one hour of work. These methods reduce detailed time tracking but may result in employees reaching the 1,000-hour threshold faster.

The 12-Month Computation Period

The timeframe for counting hours is called the “computation period.” For a new employee, the initial eligibility computation period is the 12-consecutive-month period that begins on their date of hire. If the employee completes 1,000 hours of service within this first year, they have met the service requirement for eligibility.

For example, if an employee is hired on May 1, 2024, their initial computation period runs until April 30, 2025. The employer will track their hours during this specific window. This initial period is always tied to the employee’s personal start date.

After the initial computation period, the plan document specifies how subsequent periods are measured. Often, the plan will switch to using the plan year as the computation period for all employees. For a plan on a calendar year, the employee’s hours would then be measured from January 1 to December 31 each year. This switch simplifies administration because all employees are tracked on the same annual schedule.

Plan Entry and Vesting Requirements

Completing 1,000 hours of service impacts when an employee can join the plan. Once an employee meets the service requirement and any minimum age requirement, which cannot exceed 21, the law mandates they be allowed to enter. Entry must occur no later than the first day of the next plan year or six months after meeting the requirement, whichever comes first.

To manage this, plans establish specific entry dates, such as the first day of each month, quarter, or semi-annually. For instance, if a plan has quarterly entry dates and an employee satisfies the 1,000-hour rule on May 15, they must be allowed to enter the plan on the next entry date of July 1.

Meeting the 1000-hour rule also earns the employee a “year of service” for vesting purposes. Vesting refers to the employee’s ownership of employer contributions, such as matching funds or profit sharing. While an employee’s own contributions are always 100% theirs, employer funds often require a certain number of years of service before they become nonforfeitable.

Special Rules for Long-Term Part-Time Employees

Recent legislation created a new pathway for certain part-time workers to participate in retirement plans. The SECURE Act of 2019 and SECURE 2.0 Act of 2022 introduced rules for “long-term, part-time” (LTPT) employees. These provisions work alongside the 1000-hour rule to expand coverage to individuals who consistently work a significant number of hours but may not reach the threshold.

Under these rules, employees who work at least 500 hours, but fewer than 1,000, in consecutive 12-month periods must be allowed to participate in the employer’s 401(k) plan. For plan years starting after December 31, 2024, this has been reduced to two consecutive years from a previous three-year requirement, making it easier for part-time workers to become eligible.

There is a key distinction in this eligibility. While these LTPT employees gain the right to make their own elective deferrals into the 401(k) plan, employers are not required to provide them with matching or other employer contributions based on this specific rule. However, if an employer does choose to make contributions for these employees, a special vesting rule applies: the employee earns a year of vesting service for any year in which they complete at least 500 hours.