For decades, American workers have relied on 401(k) plans to help them save for retirement. These plans offer tax advantages, whether when you contribute or when you make withdrawals, which can help boost savings. Many employees even receive matching contributions from their employer. However, not all workers have access to a 401(k).
To qualify for a 401(k), you must work a certain number of hours per year. You can work any number of hours per week, but you must have at least 500 hours per year for three years. So while full-time employees who earn an annual salary can receive 401(k) benefits if their company offers them, only certain hourly employees are eligible.
Key points to remember
- Employers who offer 401(k) plans must provide them to their qualified hourly employees.
- The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 reduced working hour requirements for long-term and part-time employees.
- Employees who are 21 years old and have worked at least 500 hours in each of the last three consecutive years are eligible.
- The eligibility criteria are based on the number of hours per year and not on the number of hours per week.
Service time requirements to participate in a 401(k)
Tax-efficient 401(k) plans are one of the most popular retirement savings options in the United States. In total, about $7.3 trillion in assets were held in 401(k) plans as of June 30, 2021, according to the Investment Company Institute.
Contributions to a traditional 401(k) are deducted from your salary before income taxes are deducted. This can reduce your total tax bill. Each year, the Internal Revenue Service (IRS) determines how much you can contribute each year, when you are allowed to begin withdrawing funds, and any penalties or additional taxes incurred if you violate their regulations. The IRS also determines when you can start saving for your future retirement through a 401(k).
Employees can contribute to their employer’s 401(k) plan if they are 21 years old and have worked 500 or more hours each year for the past three consecutive years, in accordance with the Setting Every Community Up for Retirement Enhancement Act (SECURE). ).
On average, one would have to work 9.62 hours per week to reach 500 hours per year or 19.23 hours per week to reach 1,000 per year. There are no specific weekly hours requirements. So you could work more hours one week and fewer hours the next week and still qualify if your total is over 500 for the last three years or 1,000 for one year.
The SECURE Act, Part-Times, and 401(k) Eligibility
In addition to guidelines for full-time workers, the IRS now also sets 401(k) guidelines for part-time workers. Prior to the passage of the 2019 SECURE Act, employers could deny their 401(k) to employees who worked less than 1,000 hours during the plan year.
While employers can still base their matching contributions on 1,000 hours and up to two years of service, part-time workers can now be included in a 401(k) if they meet certain criteria.
Following the passage of the SECURE Act, administrators of 401(k) plans were introduced to a new type of worker designation: “long-term, part-time employee”. According to this new definition, employers must offer their workers a 401(k) if they have worked 500 to 999 hours part-time in the previous three consecutive years. The employee must still be at least 21 years old to be eligible, but can start counting years of service at 18.
According to the IRS, employers didn’t have to count years for long-term part-time employees until January 1, 2021. This means the first batch of workers with three consecutive 500-hour years can start participating. . in their employer’s 401(k) in 2024.
Potential changes in the works
Starting in 2022, Congress is considering the Securing a Strong Retirement Act, which has been dubbed SECURE Act 2.0. Having already passed the House by a majority bipartisan vote of 414 to 5, this new bill could potentially add more retirement savings options for more working Americans.
Under the bill, employers would be required to establish methods to automatically enroll employees in a 401(k) or 403(b) plan. The bill would also reduce the number of years a long-term part-time worker would have to work the minimum 500 hours before contributing – from three to two years, with eligibility starting in 2021. The Senate was working on a similar bill called the Retirement Security and Savings Act of 2021.
Can you start a 401(k) as a self-employed person?
A number of 401(k) retirement plans are available to meet different needs. The solo 401(k) allows self-employed people, freelancers, and independent contractors to save for retirement.
What is the maximum annual contribution?
For 2022, you can contribute a maximum of $20,500 if you’re under age 50, or a maximum of $27,000 if you’re age 50 or older thanks to the $6,500 in catch-up contributions. In total, with employer contributions, a 401(k) plan cannot exceed $61,000 (or $67,500 if age 50 or older) or 100% of the employee’s annual salary, depending on the option the lowest.
Can you withdraw funds from your 401(k) sooner?
Yes, you can withdraw from your 401(k) plan before you reach age 59.5, but you will likely face fees and tax penalties. Early withdrawals generally incur a 10% early withdrawal penalty, and any money received from the 401(k) will be considered taxable income.
The essential
A 401(k) plan has significant benefits for employees who take advantage of their tax benefits and any matching contributions. However, not all employees are legally permitted to participate. You must meet the minimum annual hours worked requirement, which is 500 for each of three consecutive years or 1,000 for one year. There are no specific requirements for how many hours you must work per week before your employer offers you their 401(k) plan.