For decades, American workers have relied on 401(k) plans to help them save up for their retirement. These plans offer tax advantages, either when you contribute or when you take withdrawals, that can help boost savings. Many employees even receive matching contributions from their employer. However, not every worker has access to a 401(k).
To qualify for a 401(k), you need to work a certain numbers of hours per year. You can work any amount of hours per week, but you must have at least 500 hours each year for three years. So, while full-time employees who earn annual salaries can receive 401(k) benefits if their company offers them, only some hourly employees qualify.
- Employers that 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 requirements for work hours for long-term, part-time employees.
- Employees who are 21 years old and have completed at least 500 hours in each of the past consecutive three years are eligible.
- Eligibility requirements are based on hours per year, not hours per week.
Service Time Requirements to Participate in a 401(k)
Tax-advantaged 401(k) plans are one of the more popular retirement savings options in the United States. In total, approximately $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 taken out of your paycheck before income taxes are deducted. You can reduce your total tax bill this way. Every year, the Internal Revenue Service (IRS) determines how much you can contribute annually, when you’re allowed to begin withdrawing funds, and the penalties or additional taxes incurred if you run afoul of their regulations. The IRS also determines when you can begin saving up 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 completed 500 or more hours each year for the past three consecutive years, according to the Setting Every Community Up for Retirement Enhancement (SECURE) Act.
On average, you 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 is no requirement for any particular weekly hours. So, you could work more hours one week and fewer hours the next week and still qualify if your total is above 500 for the past three years or 1,000 for one year.
The SECURE Act, Part-Timers, 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 SECURE Act of 2019, 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-timers can now be included in a 401(k) if they meet certain criteria.
Following the SECURE Act's passage, 401(k) plan administrators were introduced to a new type of worker designation: the “long-term, part-time employee.” Under this new definition, employers must offer their workers a 401(k) if they work 500 to 999 hours part time over the previous three consecutive years. The employee still needs to be at least 21 years old to be eligible, but they can begin counting service years at 18.
According to the IRS, employers didn’t have to begin counting the years for long-term, part-time employees until Jan. 1, 2021. This means that the first group of workers with three consecutive years of 500 hours can first begin participating in their employer’s 401(k) in 2024.
Potential Changes in the Works
As of 2022, Congress is considering the Securing a Strong Retirement Act, which has been dubbed SECURE Act 2.0. Having already passed in the House by an overwhelmingly bipartisan vote of 414 to 5, this new bill could potentially add more retirement savings options for more American workers.
According to the bill, employers would be required to establish methods to automatically enroll employees into a 401(k) or 403(b) plan. The bill would also reduce the number of years that a long-term part-time worker would have to work the 500 minimum hours before they contribute—from three years to two, 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 individual?
A number of 401(k) retirement plans are available to meet different needs. The solo 401(k) enables self-employed individuals, freelancers, and independent contractors to save for retirement.
What is the maximum yearly 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 are 50 or older as a result of the $6,500 in catch-up contributions. In total, along with employer contributions, a 401(k) plan cannot exceed $61,000 (or $67,500 if 50 or older) or 100% of the employee’s annual salary, whichever option is less.
Can you withdraw funds from your 401(k) early?
Yes, you can withdraw from your 401(k) plan before you reach age 59½, but you will likely face fees and tax penalties. Early withdrawals typically result in a 10% early withdrawal penalty, and any money received from the 401(k) will be considered taxable income.
The Bottom Line
A 401(k) plan has significant advantages for employees who take advantage of their tax benefits and any matching contributions. However, not all employees are legally entitled to participate. You must meet minimum annual requirements for hours worked, which are 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 weekly before your employer must offer you their 401(k) plan.