Must Companies Offer 401(k)s to Hourly Workers?

You can often use a 401(k) to save for retirement even if you work hourly.

Regardless of whether you earn a salary or are paid hourly, saving for retirement is key to staying in good financial health throughout your life.

Tax-advantaged 401(k) retirement plans are among the best tools for helping employees save and invest for their golden years. However, hourly workers have often been excluded from participating in these plans.

Now, as a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, companies are required to provide access to their 401(k)s to certain hourly workers. To be entitled to a company’s 401(k), you must be at least 21 years old and have worked a minimum of 500 hours each year for three consecutive years.

Let’s learn more about the rules that companies must follow and how they could change in the years ahead.

Key Takeaways

  • Enrollment in company 401(k) plans increased after the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 took effect.
  • The SECURE Act requires employers to allow you to sign up for their 401(k) plan if you worked 500 hours or more each year for three consecutive years.
  • You must be at least age 21 before your employer is required to provide you with its 401(k) plan.
  • Approximately 76.1 million American workers were paid on an hourly basis in 2021.

Hourly Workers’ Access to 401(k)s

For more than 40 years, workers relied on their employer’s 401(k) plan to save for their retirement.

The traditional version of these plans allows you to contribute pretax income, which lowers your tax bill. With a Roth 401(k), you contribute after-tax money but then enjoy tax-free withdrawals in retirement. In addition to tax advantages, employees often get the benefit of matching contributions from their employers, up to a limit.

Employers are required to let all eligible employees contribute to their 401(k) if they offer one, but the eligibility rules have recently changed. One requirement is that the employee must at least 21 years old.

Previously, they must have also had a year of service, which was defined as a 12-month period during which the employee worked 1,000 hours or more. Thus, many hourly employees who worked fewer than those hours were excluded. Now, employees who work 500 or more hours for three consecutive years can also qualify.

How the SECURE Act Changed 401(k) Access

In 2021, 76.1 million workers ages 16 and older, or 55.8% of all wage and salary workers, were paid hourly rates, according to the U.S. Bureau of Labor Statistics. In an effort to open tax-advantaged retirement savings plans to more workers, Congress passed the SECURE Act in 2019.

In that legislation, the hourly requirement was lowered from 1,000 hours in 12 consecutive months to 500–999 hours in each of the preceding three years. Employees who meet those requirements are considered long-term part-time employees.

In the future, even more part-time workers may be able to participate in their company’s 401(k), depending on whether proposed legislation as of mid-2022 passes. In both the House’s Securing a Strong Retirement Act and the Senate’s Retirement Security and Savings Act, legislators were considering reducing the requirement that individuals work 500–999 hours for three years to only two years.

What makes someone an hourly employee?

In the United States, you’re an hourly employee if you’re paid at a rate based on the hours that you work. Hourly workers are paid per hour. Hourly workers must receive overtime pay of at least 1.5 times their rate for any work of more than 40 hours. In contrast, salaried workers are paid a flat annual amount made in regular payments throughout the year, and they do not receive overtime.

Are companies legally required to offer a 401(k) retirement plan?

There is no federal provision requiring that employers offer a 401(k) to their employees, though 13 states have legislation that requires employers to offer retirement plans. If an employer does offer a retirement plan as part of its benefits package, they’re required to provide it to every employee who is eligible.

When can workers begin withdrawing funds from their 401(k) without incurring fees or penalties?

When you are 59½ years old, you can begin withdrawing from your 401(k) without penalties or having to pay additional taxes on that money, according to Internal Revenue Service (IRS) rules as of 2022. You can also delay taking distributions until you turn age 72, at which point you must start receiving a required minimum distribution (RMD) from traditional plans.

The Bottom Line

Companies that offer 401(k)s must extend the opportunity to participate to qualified hourly workers.

In recent years, Congress has lowered the bar for more hourly workers to have access to their 401(k)s by requiring a minimum of 500 hours for each of three consecutive years worked, down from 1,000 hours in a year. Still, many hourly employees in the U.S. are still excluded from participating in their employer’s retirement plan.

Article Sources
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  1. U.S. Bureau of Labor Statistics. “Characteristics of Minimum Wage Workers, 2021.”

  2. Internal Revenue Service. “401(k) Plan Qualification Requirements.”

  3., U.S. Congress. “H.R.2954 — Securing a Strong Retirement Act of 2022.”

  4., U.S. Congress. “S.1770 — Retirement Security and Savings Act of 2021.”

  5. U.S. Department of Labor. “Overtime Pay.”

  6. ADP. “State-mandated Retirement Plans.”

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