What is 1000 Hour Rule for Temporary Employees?

When managing a workforce that includes temporary employees, how do you determine when they qualify for additional benefits? Many employers rely on specific benchmarks, like hours worked, to make this assessment.

One widely used guideline is the 1,000-hour rule. This rule helps employers decide when a temporary or part-time worker becomes eligible for certain benefits, such as retirement plans. Understanding how it works can streamline compliance and ensure fair treatment.

This article will explain the rule, its implications, and its impact on both employers and employees.

What is the 1000 hour rule?

The 1000-hour rule is a guideline under the Employee Retirement Income Security Act (ERISA) that allows a part-time or permanent employee who is at least 21 years old and works 1,000 hours within a 12-month period (or approximately 20 hours per week) to participate in their company's retirement plans.

Aside from ERISA, the 2019 Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0) and revised rules in SECURE 2.0 also include a 500-hour service requirement that makes it easier for long-term part-time employees to qualify for retirement plans.

A more detailed explanation of the 1,000-hour rule and other eligibility criteria for retirement plan participation is provided below.

Who is considered a temporary employee?

A temporary worker, or temp employee, is an individual who is hired for specific periods to address short-term needs or temporary assignments, such as increased workloads, seasonal demands, or special projects.

These temporary workers can be either full-time or part-time, depending on the company's requirements. Unlike permanent employees, they may not have long-term job security or the same benefits.

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1,000 hour rules and regulations

As mentioned, employees who are at least 21 years old and meet the 1,000-hour rule within a 12-month period (approximately 20 hours per week) are eligible for their company's retirement plans, according to the Employee Retirement Income Security Act (ERISA).

This guideline ensures part-time workers can access the same retirement benefits as full-time employees if they meet the required 1,000 hours. Employers track hours to determine eligibility for plans like 401(k)s or pensions.

Note: ERISA does not mandate employers to offer retirement plans but sets minimum standards for those who do.

In addition to ERISA, federal law mandates that employers permit long-term part-time employees to make elective deferrals or contribute to the employer-sponsored 401(k) plan. This rule comes from the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, but it doesn't apply to collectively bargained plans.

Eligible employees under Secure Act 1.0 are those who have worked at least 500 hours per year for three consecutive years and are 21 or older. This means employees who consistently meet the 500-hour annual requirement can contribute to their 401(k) plans.

Also, employers are not required to count service years before 2021 but may adopt more generous eligibility rules. But under the 2023 Consolidated Appropriations Act or also known as "Secure Act 2.0," the service requirement will decrease from three consecutive years to two for plan years starting after December 31, 2024.

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An example of how these rules work

Let's assume John was hired on June 1, 2021, by an employer that sponsors a calendar year 401(k) plan. On December 31, 2021, the first plan year end after John’s hire date, the employer switches his hours worked to be measured based on the plan year.

• Year one: June 1, 2021 - May 31, 2022 (500 hours)

• Year two: January 1, 2022 - December 31, 2022 (680 hours)

• Year three: January 1, 2023 - December 31, 2023 (520 hours)

Therefore, effective January 1, 2024, John should be allowed to make elective deferrals under the plan.

Note: Switching from John’s hire anniversary to the plan year means his hours from January 1, 2022, to May 31, 2022, are counted twice—in both his first and second years.

Although vesting schedules don’t impact John’s elective deferrals (since he’s always fully vested in his contributions), he’ll gain a year of vesting credit for each year he works 500 hours or more after 2021.

If John became eligible for employer contributions in 2024, he would have three years of vesting credit. This is important if he later qualifies for the plan for reasons other than being an LTPT employee. Once eligible, John doesn’t need to requalify to stay in the plan.

For 2025, only the hours worked in 2023 and 2024 will count, due to a new rule reducing the look-back period to two years.

Advantages for employers in following 1000 hour rules and regulations

Employers who follow the 1000 rules and regulations regarding the eligibility of temporary employees for retirement plans can enjoy several advantages, including:

1. Compliance and avoidance of penalties

   Following ERISA and SECURE Act regulations helps employers avoid potential fines, penalties, and legal actions that could arise from non-compliance.

2. Attraction of talented part-time workers

   Comprehensive benefits packages, including retirement plans, make the company more attractive to potential hires. This can be particularly important in competitive job markets.

3. Positive public image

   Adhering to these regulations portrays the company as a fair and responsible employer. This positive image can improve the company's reputation and brand value.

4. Tax benefits

   Contributions to retirement plans can offer tax advantages for the company. These include deductions for contributions made to employee retirement accounts.

5. Possible increase in employee morale and retention

   Offering retirement benefits to part-time workers may improve overall employee morale and loyalty. It also demonstrates that the employer values all workers, not just full-time staff, potentially leading to higher retention rates.

These advantages can make a big difference in an organization. Make sure to plan for your workforce to achieve success, and Salary.com's compensation experts are here to help you make it happen.

FAQs

Here are some common questions about the 1000-hour rule for temporary employees:

What are the new 401k rules for part-time employees?

Under the SECURE 2.0 Act of 2022, Starting in 2025, long-term part-time employees who work at least 500 hours per year for two consecutive years will be allowed to contribute to their employer's 401(k) plan.

How many hours can a part-time employee work without getting benefits?

The number of hours a part-time worker can work without company benefits depends on state and local laws. In the US, the SECURE 2.0 Act of 2022 allows long-term part-time employees who work at least 500 hours per year for two consecutive years to join their employer's 401(k) plan.

Under ERISA, the 1,000-hour rule allows part-time employees who are 21 or older and work at least 1,000 hours in a year (roughly 20 hours per week) to qualify for their company's retirement plan.

Is it legal to make a part-time employee work full-time without benefits?

There is no law preventing part-time employees from working full-time hours, but employers must follow labor standards. If a part-timer works full-time hours, they are entitled to full-time benefits, including minimum wage, overtime pay, health insurance benefits, and social security contributions. Misclassifying employees to avoid these obligations is illegal and can result in penalties.